Stock Market’s Ratio of Positive to Negative Feedback has been SpectacularSheaff Briefs Editor
In improving team performance through feedback, corporate consultants Jack Zenger and Joseph Folkman report in the Harvard Business Review, the ideal praise-to-criticism ratio is 5:1. Negative feedback grabs attention, they concede, and has the power to change behavior, but it does not make people put forth their best efforts. Only positive feedback truly motivates vigor, determination, and creativity. In his book “What Predicts Divorce,” John Mordechai Gottman finds essentially the same thing in marriage—the single biggest determinant of wedded couples’ likelihood of staying married or getting divorced relates to the ratio of positive to negative comments partners make to one another.
In the relationship between investors and the investment markets, it would seem, the “feedback” has been overwhelmingly positive. As measured by the S&P 500, Sheaff Brock Managing Director Dave Gilreath points out, since the firm’s establishment in 1981, we have experienced between 30 and 40 corrections of 10% or more, including five steep “elevator drops.” Yet, over those same 37 years, the Standard and Poor’s 500 Index has increased 23-fold!
Corrections really only matter if you are a short-term trader, Gilreath reminds us, and for long-term investors, they are annoyances. When it comes to employee performance, Zenger and Folkman see negative feedback as “a whack on the side of the head, guarding against groupthink and complacency.” It’s the positive feedback, focusing on the employees’ strengths, which ended up enabling the great growth.
Translated into the relationship of investors to the stock market, the negative feedback in the form of pullbacks and even corrections can be useful as an opportunity to buy more good stocks “on sale.” If, as Zenger and Folkman posit, positive feedback truly motivates vigor, determination, and creativity, the feedback from the stock market to investors appears to be predicting a long-lasting relationship!