Maybe the world is heading for another financial crisis, another crash and another recession but if so, it might be the most anticipated event in the history of markets. I suppose sentiment could get more negative still and markets could fall further, but if you’re negative right now, you aren’t exactly outside the consensus. And that has rarely been a recipe for investing success. Read more.
Sharing Information Corrupts Wisdom of Crowds…“The truth becomes less central if social influence is allowed,” wrote Lorenz and Rahut, who think this problem could be intensified in markets and politics — systems that rely on collective assessment…READ MORE.
My Take: One bad apple can spoil the whole cart? I guess so, if that one bad apple has a strong influence. Very interesting overview of a recently released study.
Being an investor with a long-term (multiple year) investing horizon can be a difficult strategy to adhere to. The news headlines, pundits and anyone else with an opinion are heavily weighted towards the here and now. When the market goes up elation fills the collective mood and when the market goes down anxiety (or worse) takes hold.
How does an investor with a long-term investing orientation prevent oneself from having his/her decisions influenced by the market’s manic behavior? No one answer will suffice for every investor. You must learn to understand how you react to good or bad news and how your own mind works to sabotage its own investing strategy.
The illustration above shows a range of emotions – remorse, anger, sorrow and happiness. In a period of minutes, hours or days impulsive market swings can easily stir such a reaction from any investor. Any investor that thinks the ticket to prosperity is allowing their emotions to guide them through a kaleidoscope of investments is in need of serious help.
When I think of what it takes to rise above the day to day sifts in emotion that ‘Mr. Market’ brings, I turn to Rudyard Kipling’s poem If. In the poem Kipling states, “If you can keep your head when all about you are losing theirs…If you can trust yourself when all men doubt you, but make allowance for their doubting too.” In the poem Kipling is speaking about being a man, but many of the words of wisdom espoused are relevant to what it takes to be a successful investor.
Consider this…If you are investing based on demographic trends, most people will not be investing with your same strategy. They may be playing a certain market cap sector that is ‘hot’ or running towards another trendy asset class. Money will flow from one area to another. The rhyme or reason may not be clear, but to the individual controlling their funds the rational is crystal clear…for the moment.
Whatever your strategy is, it is all but certain that you are going to encounter a market in which investors turn against your strategic positioning. In such times long-term investors are tested. Do you have the resolve to stick to your game plan or will you panic?
My advice to long-term investors is to identify a sound strategy that you feel very confident in and then identify the companies or industries/sectors (via funds) that mesh with your strategy.
For example, if I think that healthcare companies are going to experience significant growth in the next 5-20 years because of an aging baby-boomer population, I will want to invest in companies that provide healthcare products and/or services. In selecting my investments I will want to put the bulk of my portfolio’s weight in companies that are financially sound, have a well developed position in the market and are not unreasonably priced. Selecting good companies will enable you to have less anxiety when the market goes through a bad period, plus they’ll fare better. You may want to invest in some more speculative positions, but you won’t want to make these positions the majority of your portfolio. If you do, you are likely to see dramatic swings in the value of your portfolio, which is likely to cause you to panic, destroy your long-term approach, and undermine your entire strategy.
Each individual investor is different and we psychologically handle market shifts differently. Do your best to understand how you react to market shifts (positive or negative) and then consider how to best manage these psychological predispositions while maintaining your investment strategy.
Running with the herd can lead you over the cliff.
Consider this…When the ‘market’ (the collection of all investors) is the most bullish, you should be bearish. When the market is the most bearish, you should be the most bullish. Sounds simple, but marketing timing is a very difficult task. Nevertheless, taking this simple truth into consideration can help you take a step back from a extremely exuberant or dire situation and assess whether or not you should stick with or go against the current market perception of the majority.
Following momentum in the market is not a bad thing by itself, but when the momentum drops, you want to have made your exit. In the market, a good thing can turn into a bad thing within a few moments. Make sure you have a disciplined strategy to protect yourself from the thought of perpetual bliss.
Remember as an investor, the market is driven by those with the most ‘skin in the game,’ not those with the biggest mouths. How many different sources of market opinion are you exposed to daily? How many of those opinion givers have the power to move the market? Probably few, if any.
The difficulty is that those with the sway will not speak as loud as a talking head or other opinion maker. Secondly, we’re not talking about finding the oracle of the stock market to drive your guidance for foresight. No one person controls the market, but a number of people exist with more experience and knowledge than most offering up their interpretation of the future.
Finding good sources of information on a macro level is very important as an investor. You don’t want investment news that’s the equivalent of reading a tabloid. That will lead you off a cliff of financial disaster.
Macro/Big picture guidance is VERY important when investing. When the market turns bearish or bullish, the majority of stocks/funds are either brought in or taken out with the current. It’s very hard to have a portfolio that can fight the tide. If you have a good sense of the way the market is or will move, then you can position yourself to benefit from the tide’s (market’s) movement and not be in a position where you must defy the odds to come out on top.