One thing that I get really tired of is business news talking heads that try to turn single up or down days in the stock market into indicators of what stock prices will do in the longer term. It’s especially tough on big down days like we have experienced lately. The fear mongering promoted by some of these broadcasters is enough to make me want to throw something at the TV. But, in a moment of clarity, a recent interview of mega-investor Warren Buffet put the fallacy of a short term focus into real perspective.

Buffet was asked if, with Berkshire Hathaway (NYSE:BRK-A) losing $10 billion of market value over the last month because of the market gyrations caused him to lose any sleep? His response was that Berkshire had dropped by 50% three times since he bought the company. He never lost any sleep during those declines. He stated that occasional steep declines are in the nature of markets and the swings are one of the reasons that have made him rich. In fact, Buffet stated that he is “Happier buying when share prices are down, than when they are up”.

This is a lesson we can all learn to follow.

On another front, I recently received a report on the psychology of fear and investing in the stock markets. The report noted that Humans are predisposed to fearful overreaction. Traits that influence how we react to investment risk including personal background, life experiences, age, and gender. How we react to stress and fear inducing events is also built into our DNA. One study discovered a:

“polymorphism of the serotonin transporter gene: 5-HTTLPR. Individuals carrying the short polymorphism of this gene are more likely to develop depression in response to negative events and are more likely to experience a long-term emotional impact from financial losses. In some studies, people carrying this polymorphism experience more financial anxiety than others.”

Another factor that plays on investor sentiment is changes in stress hormone levels, such as increases in cortisol that change the risk tolerance of investors. As a result, investors are getting chemical induced panic signals from the basic function of their own bodies when the stock markets start to fall. With both hormones and DNA pushing the buttons, you can see why market corrections tend to be over-reactions.