It was 2 years ago this week (10/16/08) that Warren Buffet wrote his “Buy America, I am.” Op-ed article in the New York Times. Buffett encouraged investors to “be fearful when others are greedy, and be greedy when others are fearful.” In the 2 years since the article was written, the S&P500 has gained +29.1% on a total return basis through the close of trading last Friday (10/8/10).
Buffet is clearly a natural at removing any emotional connection to investing. In May 2009 I wrote about the risks of investing based on your emotions in Buy Low, Sell High. Where are we now?, and I still find the chart a valuable resource in analyzing the emotional analysis of where we are in the market any given day.
In my daily conversations, I ask everyone I talk to what they think of the economy and where they think the markets are going. In summary: There is not a lot of greed in today’s environment.
If you ask me, I would point directly between HOPE and RELIEF on the chart. What do you think?
take the emotions out of investing
We work with a lot of small business owners. A popular topic of conversation lately has to do with the fact that the markets have recovered so fast over the last few months yet their business has not improved nearly as much. Business owners just don’t get it, and find it hard to believe in this market. There is a divide between Wall Street and Main Street, and it is growing.
On Wall Street, companies are much larger and have the ability to trim inventories and personnel more efficiently than many of these small businesses. Trimming these excesses squeezes every juicy penny out of every last dollar and it all drops to the bottom line. The market sell off was extreme, outlooks became dire, and earnings expectations from Wall Street were drastically reduced. It has become easy for companies to meet and even beat such a low earnings bar.
Main St is a very different picture. Unemployment is still high and budgets are still tight. People are learning what it is like to live within their means for the first time in a very long time. Most are adjusting- frivolity is out, and bag lunches are in. It is not an ideal world, but there is a sense of comfort and confidence now that talk of an actual depression is a fading memory.
In our opinion, market levels are hardly excessive, and the outlook continues to improve. We are still 25-30% off of the highs of 2007. I think we may be at a comfortable place for the market, with some continuing upside due to excess cash and high levels of money market balances. Profits could and should continue to surprise to upside and credit conditions are still below ‘normal’. Additionally, policy makers are continuing a supportive monetary environment.
This is the concern going forward; when this loose monetary policy starts to tighten and dollars are slowly vacuumed up from the economy…then what? Will the fed get it done before inflation runs where the wild things are or will it put a new stranglehold on the economy. Addition concern lies in the comfort with riskier investments that is sought by investors in a zero interest rate environment.
It is easy to forget how scared everyone was of any kind of risk back in the 1st Quarter of this year. Where do you think we are now?
USE THIS CHART to navigate the roller coaster of investing
Buy Low, Sell high. That’s the one maxim that every investor knows, but for some reason most people ignore it. It seems that something always gets in the way: Emotions.
My most conservative clients are always eager to get more exposure to stocks when the Dow is flying high, and I got more requests to sell in January and February as the market was bottoming than anytime in my career. Why does this happen?
Logic and emotions have never been a perfect pairing. We all know it is logical to stay focused on your long term goals during periods of market volatility, but emotionally it becomes very difficult to follow this reasoning. Emotional instincts tend to contradict sound investment decisions.
If you make investment decisions based on emotion, you may regret that decision in the long run. This could be selling out your 401(k) after a 40% selloff only to sit on the sidelines watching as the market is up 30% in the next month. **these are hypothetical numbers**
Making wholesale changes to your 401k plan forces you to time the market. You need to be correct not only with selling your investments, but again when it’s time to buy back into the market. The results could be disastrous to your portfolio.
This chart is a great way to put your emotions in perspective and take a logical approach at decision making. Next time you want to make an investment decision based on emotion, look at this chart, and ask yourself: WHERE ARE WE NOW?
