The good, the bad, the market
I frequently have clients ask is the market good right now, or is it bad? This got me thinking, first, why do we personify the market, and secondly, why do we identify it with such a polar personality. For this piece I am just going to accept that we personify the market.
What are some good things we think of: home cook brownies, the smell of rain, the Pope? What are bad things we think of: spinach, poverty, war. Are good and bad absolutes? The lion is not evil because it kills the gazelle, and the gazelle is not good because it only grazes. One can be a good person, but that does not mean they are without sin. We all have that little voice, that bad streak, or impish urge. When we act out on an urge does that make us bad? The frequency in which we act out, or the compassion we show for others is what makes us good or bad. Just because someone exhibits a good behavior one moment and bad the next does not make them schizophrenic, like we make the market out to be. This behavior is what makes you who you are. Why would the market be any different? The market is not good, and it's not bad. It just is.
All too often when the market is down we accuse it of being bad. It’s in our everyday language “Bad day on Wall Street”, “Bad quarter”, “Bad stock”, “That was a Bad investment”. Our brains are wired to seek out good outcomes, and pleasurable experiences. This behavior is so ingrained we will even seek these “good” or “pleasurable” experiences to our own detriment. A couple of years ago at a conference in Vegas a group of us went to play craps one night. I know the odds, I fully expect to lose the money I put down on the table, and I rationalize this by saying that’s how much I'm willing to spend on the entertainment value. To my surprise when my turn came up to be the roller I started hitting number after number making money for everyone at the table. Making this money was an extremely pleasurable experience. So, the next night we decided to go to the casino again, and lost roll after roll. We all know the odds favor the house, and chances are I will lose, and the money I made the night before was just a fluke. However, I still went out seek that “good experience” even to the detriment of my wallet. Fortunately I had enough money left to buy the best slice of New York style pizza I›ve ever had, and that was a “good experience”.
It is this behavior we should be completely aware of when making investment decisions. We try to hit those pleasure centers in our brain. We flee the “bad market” and rush in when the market is “good”. We become fearful or greedy, and make poor decisions to our own detriment. This behavior is true amongst novice and professionals, laymen and experts alike. It is this fear that is absolutely bad. I’m not advocating we remove our emotions and only go with algorithmic computers to make all our investment decisions. The human element is very important in the entire investment process, and awareness of your emotions is important to being a better investor. I do advocate we change how we address the market. Do not personify the market. The market is not an absolute of good or bad, and, to the disappointment of the nihilists out there, it is not relatively good or bad it is just the market. When putting your money to work it becomes much more important to focus on yourself than the market. Factors such time horizon, cash flow needs, and putting money away on a consistent basis will have a much greater impact on your investments than asking if the market is good or bad.
All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. Any opinions are those of Matthew Apple and not necessarily those of Raymond James.
