Beyond Bobo: Investing in Self-Efficacy

Joel Litman

A child's toy can tell you more about investing than you'd think...

I just bought a Bobo the Clown doll for my youngest son. The "roly poly" toy has been around for more than 60 years. It's a 4-foot-tall inflatable that looks like a friendly clown, with a weighted base.

No matter what you do to Bobo – like pulling him down to the floor or punching him hard – he stands right back up.

Bobo the Clown was made famous in an experiment by psychologist Albert Bandura. Bandura's research ranks right up there with that of B.F. Skinner and Sigmund Freud. He passed away just last year.

Bandura studied how adult behavior influences children. That's what led him to the classic Bobo doll experiments in the early 1960s.

Researchers behaved differently toward Bobo the Clown in front of various groups of preschoolers. One group of adults was kind to Bobo. Another group hit, kicked, and verbally abused the clown doll.

The children who were exposed to aggression were far more violent toward the doll than the other groups.

Today, it's not surprising to hear that children mimic the adults around them. But at the time, most experts thought that kids were mainly influenced by risk and reward, not visual exposure.

Put simply, Bandura's work was groundbreaking.

It even pushed the U.S. Federal Trade Commission to pass new advertising standards. Some ads – such as a headache medicine commercial where a person whacked someone else in the head with a mallet – were banned as people realized their negative impact on young viewers.

And Bandura's research went beyond the Bobo experiments...

The psychologist also focused on self-efficacy – how believing in yourself can help you overcome your surroundings.

Said another way, the more someone believes in his own ability to do something, the more likely he'll be to succeed. And the more someone believes that things just happen to him, the less likely he is to succeed.

When we're young, our surroundings shape us. But Bandura showed that as we mature, it's our belief in our own power – our sense of self-efficacy – that makes the biggest difference.

We're not powerless... even if we grew up in negative Bobo-like environments.

Self-efficacy is self-empowerment for better investing...

Bandura attributed several factors to the strength of our self-efficacy. One of those key components is balance.

In good times, people tend to attribute all of their solid returns to their own trading prowess. This creates a feedback loop... Strong markets make investors believe their success is entirely due to their own hard work.

When the market falls, many novice investors throw up their hands in frustration. They feel powerless to the downtrends.

Given today's market, plenty of people are feeling that negativity. It doesn't help that the financial media is constantly hanging doom-and-gloom scenarios over our heads.

Sensationalism sells ads, after all. The media loves to blow up every correction into the start of the biggest bear market ever. Plenty of talking heads repeat this same wrong idea over and over.

When you're overconfident in your own investing abilities, it creates problems. So does blaming the market for everything bad that happens to your portfolio. Whether you're putting money away for your 5-year-old's future or investing as a billion-dollar institution, you have to check your ego at the door.

You have to be ready to take action and navigate the markets – not let yourself get carried away by the tide.

Believing in yourself means relying on a balance between temperance and tools. You must be able to keep your cool... and use the available data and trading strategies to be the best possible investor.

I recently met with John Sviokla, a great friend and former Harvard professor. We got together at the Harvard Club to discuss a type of financial disaster that's hitting the market... and how the mainstream media has completely missed it.

We also talked about the results of our Timetable Investor research, which looks at the state of the economy, corporate health, and market valuations.

It's the result of more than two decades of analysis into the past 200-plus years of macroeconomic patterns... measurable data and metrics... and an ongoing refinement of the best information and patterns our teams can access and create.

Plus, we highlighted an incredible opportunity the volatile markets are presenting for today's investors...

In short, while valuations have fallen, corporate earnings haven't. It's impossible to avoid talk of economic crises, yet corporate balance sheets have grown stronger. And even as the media paints a picture of terrible public sentiment, our proprietary management sentiment indicators show plenty of strength.

As-reported earnings have become even more of a mess than they already were. That data just gets less and less reliable. It's one of the reasons many investors have given up. If you look at reported earnings and reported price-to-earnings multiples, you'd think the entire market is irrational. But it's not.

You see, markets go through "phase cycles." These cycles have certain patterns that can tell you how best to invest... and when to do it. Empowered investors can use this information to take advantage of opportunities like we're seeing today.

If you want to learn more about this idea, be sure to watch my full conversation with John for free right here. It's all about self-efficacy in action, to say the least.

I truly wish you love, joy, and peace in your every day,

June 10, 2022