I am convinced now more than ever that we humans are just hard-wired to believe that when the stock market is going up those companies value is going up as well and vice versa, when the stock price is going down the value of the company is decreasing. This translates into the investor wanting to buy more when the price is going up and when the stock price or market is crashing, human nature fears that their permanent value as successful companies is somehow being destroyed, and rush to sell them at any price.
Ironically, this is the exact opposite of how we process almost everything else in our economic lives. January white sales, end of model year clearance sales on cars, Black Friday, the principle is the same. When prices are discounted, we perceive value as being improved, and we step up our purchases. When prices rise substantially, we pull back. It seems like the stock market is the only place where things go on sale and customers run out of the store.
Selling stocks during or after a crash is thus the ultimate unforced error in personal finance- yet its pure human nature. Confusing short-term prices with long-term values is thus one of the classic “consistent misperceptions of the World” in behavioral finance.
As if this is not bad enough the financial media touts so called gurus whose journalism always tend to lean negative and trumpet this news to the sky. Recently, I heard one shouting that “The risk-reward for the markets and equities is maybe as bad as I’ve seen in my career.”
My point is I wonder how many investors- beset by the pandemic, economic collapse, and a sudden 34% market crash hear this statement and say “exactly that’s just what I’ve been thinking ! and this genius just confirmed it!” This is an illustration of confirmation bias. The idea of looking for, interpreting, information consistent with my belief. Again, it is only human.
During stressful times like these, investors are under maximum pressure, and legitimately fearful of making a critical mistake. At the same time, there is so much news, data and conflicting commentary coming at them that they cannot begin to process it all. They read a snippet from a known person, seize on it because it validates their fears, and proceed to make: The Big Mistake.
This is why I am here. Not to predict the near-term course of the pandemic, the economy or the markets- which nobody else can do either, and which ultimately ends up being irrelevant to your long-term investment success. I am here to help you keep your portfolio aligned with your long-term goals at stressful times and not make: The Big Mistake.
If there is some other way to become a successful lifetime investor, I do not know what it is.
Sam