The human mind: A dangerous investment buddy
The human mind is a bit iffy when it comes to helping you to invest. A lot of research has been done in this regard the last decade or two trying to figure out why we do what we do when it comes to our money. The experts have determined that compared to other parts of our lives, our money behavior is quite strange.
For instance, if a pair of pants goes on sale for 50% off, it tends to get our attention. Even if we didn’t need new pants, we’ll at least look and might even talk ourselves into getting them. On the other hand, if the stock market plummets 50% it gets our attention, too. But instead of a rush to buy, there is a stampede of people wanting to get out the door.
This is not new information. Fortunately, professional investors like me are immune to these urges. Or are we? Sure, we passed all sorts of tests, and some of us have taken the time to study the markets, keep up with current trends, and pour over research. But alas, our human brains are no different than yours.
This means just like an amateur, some professional investors are better than others about ignoring their base impulses and using intellect instead. But there’s another problem financial professionals have that we’d rather not admit…we aren’t prophets.
Admittedly, the gurus and sages on the financial shows say, with conviction, which way the market or a certain security or an economic measure will move. They may have charts, statistics, and certainly a lot of words to back up their projection. But let’s call it for what it is: A guess. Sure, some are very educated guesses and some folks guess right more often than not. But it is still guessing. We don’t know the future any more than you do.
Good financial advisors know this about themselves. Better ones will take the risk of letting their clients in on the secret, even to the point of telling them that what seems like a sure thing is most definitely is not.
A good example is the anniversary we celebrated last month, the low point of the stock market’s response to the financial crisis. Most prophets were prophets of doom at that time. World markets were collapsing, credit markets were still mostly frozen, and unemployment was skyrocketing. Students of the markets knew that this was a buying opportunity, but none of us knew when the market was going to end the slide, turn, and recover. There was a half-price sale going on, but would there be a 70%- off sale around the corner?
These days the market has been behaving itself (at least it was as I was writing this). Bouncing around still happens. Everyone makes their guesses based either on study and logic, or on the iffy investing brain and its alternating fear and euphoria.
I have my extremely super-duper ultra-educated guess on what the future will bring, just like I did during the last financial crisis. Your human mind needs to concentrate on one word in that last sentence:”Guess.”
This article was published under the title "Crystal ball murky on markets"
in the Wichita Falls Times Record News on April 13, 2014.