Welcome to the end of the week! Just sit back, relax, and enjoy this weeks roundup in another edition of Happy Hour.
Missing Efficient Markets?
On Monday, Twitter became a rolling stream of market psychologists trying to talk whoever was listening off the ledge. It’s been rolling all week.
I miss the efficient markets. When fear, and other feelings, were theoretically impossible.
Less than a decade ago, none of this was possible. Sure, Twitter didn’t exist, but neither did emotion in the markets.
Efficient markets would have none of it. The all-knowing market was perfect. Rational. Unbeatable. Fear and greed couldn’t exist. Nonbelievers were publicly flogged, then ostracized for it, and went about their day.
And we were ok with that.
For those not in the know, some very smart people believed the markets were efficient, reflecting all the available information into stock prices. It was THE explanation for price moves.
Think of it as the Dark Ages of Finance.
Index funds (a good thing), passive investing (a good thing for those that stick to it), and the undying belief that “you can’t beat the market so don’t even try” (which conveniently makes for a great index fund company tag line by the way) was born from this. Otherwise, it messed with a lot of people’s heads. And lasted decades longer than it should have.
Those were the days.
That’s all changed. Most of the true believers saw the light thanks to the financial crisis. A crisis will do that. People turn to extremes. For this crisis, it was psychobabble. And bonds. It’s always bonds.
Emotion was always present in the markets. It was just ignored for four decades. It took financial collapse to get enough people to notice. Now they are all hypersensitive to it.
And Twitter is filled with these new-found behavioral experts.
There’s one problem. Some actually put the time in to understanding the human condition and all the biases we hold. The rest just play the part.
These armchair market psychiatrists were out in full force this week. Rather than denouncing any involvement of emotion, that’s all they see. It’s become a side business to pull humanity out of every market move and decipher feelings into future performance.
It’s become another distraction from what’s important – yourself.
The great investors repeat this ad nauseam. We still don’t listen. They always knew emotion was involved. They found out because of their process. Each one professes the need to be humble, learn from mistakes, and in turn, learn about themselves and how emotions sometimes drive their decisions.
Like not letting go. Rather than tossing something out, I stuff it in the closest, or a desk drawer, until I run across it, and toss it, years later. We’ve all done it. I do the same with stocks.
Lesson learned. Don’t get greedy, cut my losses early, and don’t hoard garbage.
Even if stocks aren’t your game, a rules based investing process keeps that mistake in check. It keeps most things in check.
Like reminding you of your plan, your time horizon, and what to do (or not do) with your portfolio whenever the market turns.
Times like these are when investors learn the most about the markets and themselves. You don’t need a psych degree to know what you’re capable of. Or a constant flow of news. Or reminders from Twitter. A market correction is enough. Experience in the market, and an honest look in the mirror, is the greatest learning tool you have. Don’t waste it.
- Dealing with Volatility – R. Ferri
- Some Things to Remember About Market Plunges – M. Housel
- Swedroe: Are You Prepared To Face A Bear? – ETF.com
- Opinion: The Stock Market, Inevitably, is Going to Crash – MarketWatch
- Before the Advice, Check Out the Adviser – NY Times