Can't Help Falling In Love -- An Investing Lesson?

Quite a few years back, I read an investing book that said something so simple yet profound. Now, I can’t recall the title of this book, but the message stuck.

In the book’s intro, the author mentioned that stocks are peculiar things in that more and more people would be willing to purchase them as prices increase. He said that while many people would deliberate a tangible purchase like a fridge or TV, these same people would chase prices when it came to buying stocks.

Indeed, this is a revelation. Such phenomena are displays of human psychology at work: both herd instinct and the fear of losing out are evident here. And both are actually destructive behaviours that will hurt an investor. While I am no expert in how the human mind works, personal investing experience attests to these observations. Perhaps you have had a similar experience?

So, when I heard the words “only fools rush in” from the Elvis Presley song “Can’t Help Falling In Love”, the memory of that book’s “investing wisdom” instantly flashed back. These words rang so true that I became curious about the rest of the lyrics. So away I went, investigating…

Interestingly, someone else had beat me to it — Matthew Huttons published a similar observation in his “Forex Secret Tips Trader’s Blog“. In Matt’s post titled “Investing Wisdom From Songs” (November 12th, 2010), he talked about how Forex prices behave in breakouts and how the song lyrics alluded to the behaviour of market players taking these trades. Read the article to get the full scoop.

With Matt’s understanding [see footnote], I am doing a re-take of the song and posting it WittyCulus.com style. (Note: I like to make it easy for readers to appreciate the context by listening to the song; plus enjoy it if it’s their cup of tea.)

Now, let’s have a closer look at the lyrics:

Wise men say only fools rush in  (1)
But I can’t help falling in love with you  (2)
Shall I stay  (3)
Would it be a sin
If I can’t help falling in love with you  (4)

The following points are worthy of note. I have included a tip at the end of each to provide a “mini” lesson on investing wisdom, if you may call it that.

1. “only fools rush in” depicts the excitement of those who chase stock prices and invariably their sad outcomes as prices make a U-turn subsequently (hence they are “fools”). In investing parlance, bullish trends can often end with blow-off tops that see prices plummet quickly when nobody else would support those high prices. Thus, selling comes in full force as profits are taken and others (actually wise traders) cut loss.

   Tip: “Chasers” can get slaughtered, as you’d never know if you’re in that last group of buyers. Avoid buying based on rumours, as price behaviour arising from such actions can usually fool you into believing you’re on to a good thing. If you feel you’ve been left out, stay out!

2. “can’t help falling in love with you” portrays an investor’s attitude towards the stocks he/she bought, especially at or near the height of price extremes. At such times, the so-called “buy and hold strategy” is challenged as the “chaser’ tries to deal with eventual rapid price drops. It is “only human” to postpone the decision to sell quickly and limit the damage (i.e. cut loss) and to hold on for an impending recovery (or so the investor kids himself to believe).

   Tip: Don’t fall in love with your stocks. Get out if prices hit your stop loss level. You can always buy at a lower price later if that company is still worth investing in.

3. “Shall I stay” is the thought that plays in the head, when the “chaser” contemplates the first chance to fold the trade. Usually, this opportunity for a small loss is not taken, and the subsequent fall in prices only serve to make the investor more “hopeful” (it’s more like wishful thinking here) for prices to rebound.

   Tip: Take that “first bus” out of a losing position, especially if your stop loss is already hit. Losses can get bigger and any hesitation will only weaken your resolve to get out; there could also be missed opportunities in other (better) trades as funds are being strapped.

4. “If I can’t help” suggests the typical problem of not being able to deal with losses. In reality, help is available in the form of stop loss orders where losing positions are closed out at pre-determined prices.

   Tip: Always determine your stop loss level before you take a trade. If the trading platform allows for stop loss orders, enter one immediately after your trade is confirmed. If it does not, leave a working order with your broker to monitor prices and close out a losing trade (when the stop loss level is hit) on your behalf.

So there you are, a short investing lesson “distilled” from an oldie the WittyCulus way. As Matt mentioned, one can’t help wondering if the song writers themselves are experienced investors…

Besides Elvis’ original recording, “Can’t Help Falling In Love” was also featured in Disney’s “Lilo and Stitch”. The British reggae group, UB40, also covered it in 1993, topping both the US and UK charts. But I feel the version sung by “the King” is everlasting — have a listen to the live performance below. Notice Elvis’ emphasis on the words “only fools rush in” …

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WittyCulus.com respects the copyright of other owners and publishers. In borrowing from Matthew H’s inspiration (with his agreement), we have included hyperlinks back to his original article and blog site. We also suggest that you read his article to gain the correct perspective.

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