20th January 2011 by Ken Eisold
In a hilarious account of investor inconsistency, how the mind veers and tacks in response to shifts in financial markets, Robert Stevens at citywire highlights the power of the alternating drives of greed and fear. It’s like a Marx Brothers comedy, and all too true. But why do investors behave that way?
He correctly suggests the power of the group to pull the mind off course. Faced with uncertainty – and in the absence of a clear strategy – investors are tempted to follow the crowd, often without knowing that that is exactly what they are doing. Not thinking for yourself, he writes, “you are relying upon the views of others to decide when it is a good time to buy.”
I would put it slightly differently. No one knows what markets will do. As investors, we are all more or less flying in the dark. Some are more informed than others, but no one actually knows what will happen to prices – unless you have the benefit of insider knowledge.
As a result, we are all somewhat anxious and insecure – and we have to find ways of dealing with our persistent, nagging doubts. So we seek confirmation and reassurance from others, seduced into believing that if others are acting in a certain way, they must know something we don’t. We get a temporary, fleeting sense of security from blending into the group. It’s a “defense” against fear.
Robert Stevens at citywire is suggesting that your own strategy and research is a better “defense.” That is, having a strategy does not guarantee success. It’s a way of gaining some degree of immunization against fear – and avoiding the inconsistent tacking and veering that out insecurity can otherwise lead to.
That’s a really good point. So, do the research, develop a strategy – and stick to it. Your strategy should include recognition of the fact that, sometimes, things don’t work out as you had hoped. You will need to change course. But have a strategy for that as well – and stick to that one too.
Otherwise you will be playing a role in another investor comedy – and just possibly one with tragic consequences.