Relax, step back, then invest

Rudyard Kipling said it; Patricia Jennerjohn practices it – with her own spin, of course.

If you can keep your head, while all about you are losing theirs … you’ll be a better investor.

That’s the essence of an investing philosophy that the certified financial planner imparts to clients using insights that she’s gained from studying behavioral finance.

“We don’t have to be victims of the times or panic when hearing about the stock market and the economy,” says Ms. Jennerjohn.

When clients call about the “Ten Best Funds to Buy,” she tells them: “Turn off the TV, go for a walk or meditate, and just relax.”

Spotting shortcuts

A music major turned MBA, Ms. Jennerjohn, 51, founded Focused Finances, an independent fee-only financial planning firm in Oakland, Calif., eight years ago to not only advise clients, but also to teach them how to resist the latest stock market frenzy.

Ms. Jennerjohn offers classes in behavioral finance for clients – she intends to make it a requirement in the future – because she believes it helps them recognize the dangers of mental shortcuts.

She attributes the phenomenon to investors who tend to make decisions behaviorally rather than rationally.

“Myopic loss aversion,” for example, is a behavioral finance concept that many clients may suffer from without realizing it. It’s when people tend to overweigh the painful experience of a loss, Ms. Jennerjohn says.

She has found that clients will focus on the one fund that is down for the quarter, even if four others are up.

Another concept is “anchoring,” a tendency to value a stock or fund based on its price history rather than its fundamentals.

When Internet stocks were at their peak, there was no traditional way of valuing them, and a lot of naive investors began comparing the price per share of other companies rather than looking at fundamentals, Ms. Jennerjohn says.

Love is blind

She cites a client who approached her to invest in Peet’s Coffee & Tea Inc. [PEET].

Shifting into behavioral-finance mode, Ms. Jennerjohn explains that although the Emeryville, Calif., company had a strong mail-order business, it was better to buy its beverages – not its stock.

“Look at Webvan, everybody loved the concept, but not enough people patronized them,” she says.

“Don’t invest in a company just because you love their product or service. You need to get dispassionate and analytical about it. Love is blind even when it comes to a stock.”

Bill Milligan and Marc Garner, a couple in Berkeley, Calif., have been using Ms. Jennerjohn’s services for the past four months. They now have a financial plan.

Going in, some of their concerns were how to pay less in taxes, how to consolidate debts and whether they should buy more property.

They say they have begun to look at their finances differently because of Ms. Jennerjohn’s guidance.

“People might think this is really abstract,” says Ms. Jennerjohn of her behavioral finance theory.

“A lot of it is stereotyping. They abandon an observation of a long-term trend in favor of a short-term panic attack and overconfidence, which is confusing luck with skill.”

The high-energy planner, who manages $17 million in assets, says she’s seen enough of what she calls “financial pornography,” her term for information overload, to understand why investors are confused.

“The objective of the media is to get you to read their publication, and some go a little too far by building your anxiety,” she says.

Ms. Jennerjohn is not a stock picker, however.

Even she admits that she can take the wrong path.

“There is a real art to picking them,” she says.

Her credo: Stick with mutual funds since they pose less risk.