Tuesday was a dreadful day in the markets. No sugar coating it. According to the media…..worst one day since the Covid days of 2000. What they don’t mention is that we are about 10 percent above the June lows. Bad news sells faster than good so not surprised. Yes, inflation is hot. To those of us who actually buy food and other necessities of life, the news is not a surprise. We have opined on this for the last 6 rantings. The Fed will raise rates and drain liquidity until inflation breaks. Nothing new. Nothing different. Our position has not changed. We are slight overweight equity (stocks) in our models. If we get another down leg and get close to the June lows, we will be adding to that. It’s the long game and we like our portfolio positioning going into the volatility. Conservatism has served us well and projecting ahead we intend to position to catch the forward look.
Market prognostication aside….This got me to thinking and a subject for today’s rant. The subject is longevity and doing the right thing. As an old timer in the business, I believe a huge part of the problem is the human animal itself. Yes, we are mostly to blame….. Let me explain. Starting with a “duh” statement…. We all know markets go up and they go down. Sometimes, a whole lot. We know too, that over time, the trend is up. We also know not to “put all our eggs in one basket”. With such easy concepts, why is it so difficult for the masses to do the right things. Statistically, a small minority is successful growing wealth over time. Most fail miserably. Numerous studies bear this out and paint a picture that isn’t pretty. The great unwashed masses continue to buy high and sell low. Chasing the hot thing and dumping in disgust as the markets bottom. Why…..
Humans suffer two major psychological wiring flaws when it comes to being a successful investor. First, we suffer from cognitive bias. This means we project what we see recently into the future in our decision making. We rely heavily on recent trends and current themes in how we process. If the markets are ripping higher, we subconsciously project that into the future. Same with down markets. If our statements bleed red, we tighten up and intuitively look that into the future. The second wiring flaw is the “greed/fear” mechanism. When it comes to money, we don’t have a middle. It’s “all in” or “all out”. Combining these two biases it’s easy to see how the mind gets us in trouble. Loading up at the top only to bail and sell out at the bottom is a recipe for failure which is what the masses do… fail.
Up moves (aka known as bull moves) happen slowly and over time. Historically, 70 percent of the time (based on days) markets are spent in an upward type move. They unwind slowly, persistently, and inexorably over months and years.
Down moves (or bear moves) on the other hand happen fast. Very fast. Shoot first and ask questions later so to speak. Down trends hammer us and damage us. Like a sucker punch. The market moves with the speed of a spooked deer. Sometimes, for a reason. Sometimes as a head fake. Humans are “biased based” individuals. Our wiring is consistent and evolved over millions of years. From fighting off predators who would eat us to avoiding traffic and crowds, our inherent beliefs have served and preserved us as a species. We fight or we flee but we don’t just do nothing.
This is the problem with, and for, investors. We become jubilant (some would say euphoric) when things are going up. Complacency takes over. We get sloppy and sometimes greedy. Picking individual stocks sounds great because, well… you know…. we are “smart”. Risk tolerance becomes an afterthought. The danger zone at the upside is exactly that. We forget how it felt when things were down and we “lost money”. Left unchecked, when the proverbial s*%t hits the fan, the damage is much worse than one imagined. The down-market leaves scars. As we always say “nobody actually likes to lose money”. If one succumbed to the high-risk decision making listed above, the portfolio declines are worse than one expected and the pain worse than planned. The answer (tongue in cheek) is of course to sell and “preserve your money”. That preservation usually lasts until the markets have not only recovered, but in a big way. The guy on CNBC says its “clear sailing” and we get back in. Slowly at first but “all in” as things progress…. Normally near the next cyclical peak. Just in time to accumulate at the highs.
As we always say….”markets look ahead”. People “look behind”. This time is no different. Yes, it’s been a “Rocky” year but don’t let that cloud your beliefs. We are looking ahead, and the forward look is actually pretty favorable. Markets could decline further but the smart money is picking up the bargains while the great unwashed masses are bleeding and heading for the hills. Just like it’s always been.
As always, don’t hesitate to reach out for any reason at any time. We work for you and value that relationship today and always.
Ed, Frank, Tammy
Edward Stiles
200 N Union St.
Kennett Square, PA 19348
Office: 610-719-0615 | Cell: 610-745-1931
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