Value Investing: Tools and Techniques for Intelligent Investment

Chapter 12. Maximum Pessimism, Profit Warnings and the Heat of the Moment^[12]

We are terrible at emotional time travel. In the cold light of day, we simply can't predict how we will behave in the heat of the moment. Sir John Templeton said 'The time of maximum pessimism is the best time to buy', however, buying when everyone else is despondently selling isn't the easiest thing to do. One potential solution to this problem is pre-commitment. While the removal of free-will tends to be greeted with horror, it is the easiest way of preventing the emotional hijacking of rational decisions. For example, Sir John, having done his analysis of intrinsic value in the cold light of day, would submit buy orders well below the market and simply wait for them to be filled.

• Psychologists have documented that we are very poor at predicting how we will feel in the future. For instance, when we are stuffed after a good meal, we can't imagine feeling hungry. Likewise, when starving we can't imagine feeling bloated. When we are in a cold, rational frame of mind we say we will behave in one fashion; when we are smack bang in the middle of a situation with our blood pumping, our previous plans are thrown out of the window.

• Let's imagine you are hired as a proofreader. You can set your own deadlines, hand everything in at the last moment, or go with a predetermined set of deadlines from the publishers. Most people go with handing everything in at the last moment: after all, they reason, they can do the ...