January 25, 2006
Psychology of the Investor
Dow hit 11,000 on January 9, for the first time since 2001, the
milestone brought hope and expectations of continued better things to
come. Investors brimmed with optimism.
but then . . .
companies released disappointing earnings reports. Certainty faded that
the Fed would stop raising interest rates. Osama Bin Laden made one of
his patented Al Jazeera cameos. And just like that, a 333-point
sell-off ensued, and now investors have returned to gloomy despair and
All this in
Now let me
see if I have this straight: Two weeks ago, it was time to put your
hard-earned money into stocks because we all need to put our wealth to
work for us and protect our futures. We all need to give our money a
chance to grow and perform in the hands of proven business people and
two weeks ago.
was before we learned that a) some big companies aren’t making as much
money as they would like; b) there is a chance interest rates might go
up again; c) Bin Laden can still work a tape recorder.
investing. No more putting wealth to work. No more giving any money to
anyone. That’s over now. Bin Laden is raising interest rates and the
people who make blue chips are losing market share to the potato chip
people. We clearly can’t be making investments now.
So goes the
psychology of the investment world, a phenomenon that has never made
sense to this small entrepreneur, if only because the same people who
are always wanting to manage the money they think I have are the ones
telling me that you have to view investing as a long-term proposition.
makes sense. Asset Class A is up this year while Asset Class B is down.
Next year, B is up and A is down, while D has emerged from the dregs to
lead the pack and Asset Class H is showing signs of big things.
it will all change, but if you can be reasonably sure of one thing, it’s
that the overall trend of the market over time will usually be up. So
spread your money across various classes, rebalance them occasionally
and be patient.
learn tomorrow that Michael Moore won an Oscar or someone found a sweaty
cotton ball in a bottle of Tylenol. Then, put your money in a shoebox.
I have been
a business owner for six years. I have not always made the best
decisions. But I have to believe there is still hope for me, because at
least I don’t make decisions to invest or refrain because a headline
made me nervous. And yet, there are people who apparently do this very
thing every day, and these people are let loose on Wall Street – their
behavior considered normal.
seem to demonstrate a habit of not reading much beyond the headlines –
because if they did they might reconsider their panicky sell-off
impulses. When Yahoo, Intel and Citigroup announced “disappointing”
earnings (in other words, less than the optimistic guesses that preceded
the announcements), the psychology of the market took a beating. But
according to Thomson Financial, only 24 percent of the 95 companies in
the Standard & Poor's 500 that have reported earnings have missed
estimates. The norm is 20 percent, and even with 24 percent falling
short, that’s still 76 percent making their goals.
This is a
reason to panic? Thomson Financial also estimates that S&P 500 companies
overall are expected to grow at an average of 13.1 percent, giving us a
15th consecutive quarter of double-digit growth.
certainly sounds to this financial non-sophisticate like the kind of
long-term performance we are told to seek when investing – an unwelcome
news item or highly placed executive branch indictment notwithstanding.
realize how dated these comments must sound. Wisely and prudently
investing is very two weeks ago. Now that the jitters have returned, the
best a guy can do is keep checking his wallet to make sure terrorists
and Michael Moore haven’t swiped it.
Super Bowl commercials start. That’ll get the market in gear.
© 2006 North Star
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