Today's opening missive will not debate the merits of today's stock market valuations (as that will come in the days ahead) but rather address the role of emotion in the investing equation.
The emotions of both fear and greed keep us from making as much money as we should.
Warren Buffett has often written about the madness of investing crowds and why it often pays in the long run to be a contrarian:
- "You can't buy what is popular and do well."
- "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is."
- "You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right -- and that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else."
- "A public-opinion poll is no substitute for thought."
- "The most common cause of low prices is pessimism -- sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It's optimism that is the enemy of the rational buyer."
- "If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."
- And above all, let's be attentive to Buffett's observation below that applies as much to today's market as it did when he wrote this quote several decades ago: "Remember that the stock market is manic-depressive."
I have long written that the crowd usually outsmarts the remnants, but in an increasingly emotionally charged and volatile market (which demonstrates no memory from day to day) confusion reigns, and the crowd seems to bend with the emotion (and news) of the day.
What may cause rapid changes in sentiment and how should the average investor respond?
Arguably, this manic crowd behavior (manifested in the ups, downs and insane volatility that follows) is reflected in the mood swings from depression to euphoria that have been goosed and exacerbated by the media, by performance-chasing investment managers and by high-frequency trading, momentum-based strategies and levered ETFs. We must try to stay (and invest) above the hype, avoid the pressure to "get in" during vertical moves (and to sell during deep swoons) and continue to try to take advantage of the volatility served up by the robots (rather than having it sap our confidence).
Let me briefly go over three influences that we must put into perspective -- namely, the media, hedge fund managers and the quants.
"You don't realize how easy this game is until you get up in that broadcasting booth."
-- Mickey Mantle
The business media's role is to objectively and without prejudice tell the score. provide a market perspective (in describing what the market is doing and why), present other professionals' opinions of individual companies, analyze the economy, economic releases and news, and interpret government and central bank policy -- all for the purpose of improving the public's understanding of the market's influences.
But too often media coverage becomes theatre.
The media have a tendency to amplify emotion (especially to the upside!) and have a peculiar tendency to view the world as if reflected in those fun-house mirrors, with the relentless maw of endless outlets in need of attention-grabbing headlines.