The two Es of investing

Host Mary Walden thinks of understanding investing and investment markets as a lifetime endeavor, and that’s why she’s attracted to investment ideas that make sense and are clear. Her husband, N.C. State University economist Mike Walden, says that one such idea is called the two Es of investing.

He says, “I must say this is not original with me. I think an author that I read recently came up with this one, and I thought it was clever. And what he said that the Es of investing were (were) economics and emotion. And he said both of these factors can be important in investing and understanding investing.

“I think what he said about economics is pretty straightforward. What he meant by that is that investments are driven, ultimately, by their fundamentals — how good a  track record they have in their sales or earnings or prospects for growth. And investors obviously look at this and make decisions about buying and selling particular stocks, for example, based on the economics of that company.

“But the author also said there’s an emotional part — a psychological part — to investing. And this … sometimes happens when investors throw out the economics factor, the fundamentals factor, and they get cut up in the investment. It’s almost like an emotional high here, where they say, ‘Well, maybe I might be a little leery about this investment, but everyone thinks it’s going well, so I’m going to get on the bandwagon.’ And what this can lead to, of  course, are big bubbles — what we call big bubbles in the investment world. And I think many of us .. say we had a bubble in the housing market from roughly 1999 to 2006.

“The problem with that emotional part of investing is that those bubbles that they are created oftentimes bust, and you get a big drop. So the emotional part of investing can be much more volatile. And, again, I think understanding both of them and understanding both of the motivations behind them can help us understand and maybe protect ourselves in investing.”