I had an entirely different column in mind for today. But the events of last week were so peculiar, and so revealing of another classic investor foible, that I shifted gears.
This will be one of the few Apprenticed Investor columns written in response to current events. I'm doing so because I feel it's necessary to address last week's topsy-turvy market action. More specifically, the investor reaction to it.
A brief background: In my day job, I advise institutional investors on the state of the markets. When risk, according to my metrics, has risen unacceptably relative to reward, I become cautious. When the reverse happens, I get more aggressive. This has been my style for some time, and it works for me. Once I explain the process, I'll lay out the mistakes the public makes in reaction to these market calls.
'Are You a Bull or a Bear?'
I've heard this question countless times the past few weeks. And I find it a stunning rejection of Darwinian logic that proponents of such blather have managed to evade extinction. Investors simply never get asked a more distracting and pointless question. Effective investors find their style, then read the market and adapt accordingly.
Of course, in discussions about Wall Street, the bull and bear are mesmerizing. How often do we hear a newscaster somberly intoning: "The bears got gored by the bulls on Wall Street today..." The very next day, we hear the same talking head reverse course: "On Wall Street, the bears came out of their caves to chase the bulls, as the Dow dropped..."
The markets we saw last Wednesday and Thursday are textbook examples of why the colorful imagery of the bulls and bears is magnetically attractive to copywriters and repellent to good investing.
Why is this such a problem? Because of the "folly of forecasting": Once people commit to a position, there is an unfortunate tendency to root for that perspective. Even worse, people stick with their forecast, regardless of what is actually happening in the market. We addressed this in the very first Apprenticed Investor,
Expect to be Wrong
. But instead of preparing, people dig their heels in and cost themselves money by being more concerned with trying to be right rather than making money.