By Scott Reed
Last time I wrote about not spending time worrying about things you can’t control. I was surprised by the response to that column. Obviously there are a lot of people out there that are worried about things they can’t control and wish that they could stop. It’s not easy to stop worrying about the uncontrollable.
We tend to think we can control the outcome of almost anything. We also hate to lose about twice as much as we love to win. So when the financial press and all the financial authors out there start writing and talking about how bad things are and how likely we are to have a “double dip” recession, it is a short step for most people to start trying to figure out how to stop it. Or at least how to stop it from affecting them.
That’s when patience and reason have to take over the decision-making process. We investors often make a big mistake: We don’t really look at the stock market with the idea of “cause and effect” – we look at it as “effect and cause.” We tend to wait for something to happen and then figure out what to blame.
To complicate matters, we have hundreds of people trying to be viewed as experts. They want to tell you their version of what happened and their version has to be different from everybody else or they won’t get noticed. How many times have you seen three analysts on TV who all agree with each other? So it is very hard to pick the right cause.
I hear a lot of people talking again about Greece and how Greece is bringing down the market. Greece certainly is something to worry about, but the stock market was going down regardless of the problems with Greece. Markets don’t go in straight lines and markets have to take a breath every now and then. Markets consist of a bunch of individual investors who make up their own minds and then throw their decisions in with every other investor’s decision to come up with a direction.
When the market goes down it doesn’t mean there were no buyers. There is a buyer for every seller. There is someone who thinks they paid a good price for a stock and someone who thinks they got a good price for a stock. The conglomerate of these decisions tells us which way the market is going.
Looking at the Dow
If you knew nothing of the world around us and were simply presented with a chart of the Dow Jones Industrial Average, would you be able to make an educated guess on which way the DJIA was going to go? Let’s see, the DJIA bottomed out at the close of trading on March 6, 2009, at around 6,400. Between March 2009 and May 2011, just two short years, the DJIA more than doubled in price. The further up the charts the DJIA goes, the more investors want to lock in their profits and sell some of their positions. So you have to believe at some point the Dow is going to go down. It just makes sense.
What will the trigger be? No one really knows that, because to know that you have to get in the heads of every individual investor and then figure out how that is going to play out with the whole group. It’s impossible. Remember my last column? Don’t spend so much time trying to figure out the impossible. What you do know is that you have every reason to believe that the DJIA, after such a tremendous run, will go down at some point. If you believe that statement, then it won’t surprise you when it happens, and you won’t attach so much importance to the event that triggered the decline.
That’s a good thing. When you are not surprised by an event, you tend to make better decisions regarding your investments and that will pay off down the road. I feel sorry for Greece and I have no doubt that it struggles will ripple through the economies of Europe and eventually find its way into ours as well. I believe the DJIA went down recently because it has gone up too fast and it was time for a break. This is Behavioral Finance 101 and what has happened the past month is simply business as usual in the investing world.
What does that mean for the rest of this year? Your guess is as good as mine. Just keep things in perspective and don’t lose your focus, no matter what the “experts” say.
Scott Reed, CIMA, AIFA is CEO of Hardy Reed in Tupelo.