17 Dec What Are You Thinking When The Market Sentiment Is Bearish
Straits Times Index dropped 2.4% the day before.
I would guess some investors are starting to get worried about their positions.
And the media is constantly painting a very negative outlook with bearish news and scary headlines.
Headlines related to Russian Ruble plunge
- “The Collapse of Putin’s Economic System”
- “Apple Stops Online Sales in Russia Over Ruble Fluctuation”
- “Is the Russian Collapse Wrecking Your 401(k)?”
- “Russia’s Problems Are Everyone’s Problems”
- “Hedge Fund Manager Who Remembers 1998 Rout Says Prepare for Pain”
On Oil price going below $60 per barrel
- “Elon Musk is losing out big time on cheap gas prices”
- “Stocks, bond yields much lower in 2015: Mark Grant”
- “Falling oil price poses new threat to banks”
- “Energy Stocks, Bonds Keep Sliding Down Oil Slick”
- “Some companies won’t survive the oil meltdown”
Why does the media write these news?
Do they choose the best news to write on? No, they write what they think most people want to read.
You know that the media makes money with ads and the higher readership they have, the higher ad fees they can command.
Hence, say given 10 different news to report on but only one column is available, a journalist or an editor has to choose the news he thinks that is going to bring more eyeballs to it and discards the other 9.
Given that the market sentiment is bad, people will want to read bearish news. Hence, pushing out scary headlines will attract readers.
Investors who are worried will start to look for information about the markets. They read all these scary stories and they ‘confirmed’ the market is going down and they would want to sell some of their positions. And the bearish sentiments are further reflected in the stock market.
This is confirmation bias working at its best.
We live in a weird world right?
Wrong Expectation – I can make $x in x days
I often receive questions on my holding period for my stocks. I would say expect to hold for 5 years and beyond. Sometimes we get rewarded earlier but we should be prepared to hold for at least 5. I would see some disappointment in their face. I guess they were hoping to take profit in a few months.
We live in a fast paced and efficient world. The culture has shaped us to be impatient and to want results immediately. But there are some things that could not be rushed, just like a baby needs 10 months to birth.
If the market rewards you randomly and it is almost impossible to know when you can take profit. Investors who impose a structure and a routine on rewards are in fact very audacious. It is trying to demand a limb of a baby to be delivered first and other parts to come every month until the baby is fully assembled on the 10th month.
We cannot force the market. Stop thinking you can and life would be less stressed.
Wrong Expectation – My stocks can only go up
Most investors expect their investments to go up in price. Of course, they wouldn’t have bought the stocks if they believe the stocks are going down.
But this upward biased expectation is the root of the problem. Investors are not prepared when their investments go down and they naturally felt lost and disappointed.
I always believe that if an investor should not invest in stocks if he cannot expect his stocks to drop 50%.
The reason to expect a holding period of 5 years is to ride out the downside.
I bet you heard of the saying, “take care of the downside and the upside will take care of itself.”
Even though we know that, most investors do this, “take care of the upside. What downside?”
Investment Psychology is key to Investment Success
I know that an investor’s ability to manage his psychology plays a bigger role than his investment strategy in determining his investment success.
Pareto’s Principle would suggest 80% of investment success is due to investor’s psychology.
This is pretty intuitive. For example, you have an investment strategy that works which increases your success by 20%. You just have to implement it accordingly, which is the remaining 80%, and you will be a successful investor.
Let’s bring our minds to keeping fit. The strategy which everyone knows is to eat less and exercise more. Knowing the strategy is not going to make you slim. You need to do it, which is the hard part. You need to overcome the psychology of laziness.
Similarly, knowing that you have to sit tight and ride through the downs in the stock market is not enough. You have to actually DO IT.
If you understand how difficult it is to exercise everyday, you should also see the challenges making the right decisions for your investments all the time.
The only way to understand your psychology is to first accept that you are fallible and vulnerable. This would lower your defence about yourself and start to see ‘you’ clearly.
Without the defences (ego), you can review your actions and thoughts about your investments. More often than not, you would realise some of your actions are illogical and many worries are unfounded.
There are more literature on investment strategies than on investment psychology. One of the reasons is that the latter is so difficult to put to words. It can only be learned through experience and not by books.
It is also the hardest things in life that hold the right keys to your success. Face it and deal with it. Stop running away.