That past couples of weeks required considerable restraint on my part. Everyday brought with it what seemed to be endless opportunities to buy low and sell high. The temptation of making a quick profit off the mass hysteria that engulfed us and the markets was at a peak.
I sms’ed the same generic message to my wife at least twice a day: “this kind of opportunities won’t present themselves again anytime soon”. Everywhere I looked I saw a big “BUY ME” sign. Stocks, bonds, funds, funds of funds and what not all took severe hits. Stock exchanges throughout the world plummeted to price levels considered reasonable 5 and 10 years ago. How could someone not buy?
My wife, acting out the role of the voice of reason, tabooed all market activities. This is no time to enter the markets. Better to lose a 30% increase and get back in when the trend is clear than to risk losing 50% on your investment.
I was so certain I was right I could sense the stinging pain of losing the possible revenues. Naturally, when the markets responded, in a similar hysteria, to the steps taken by the Fed and the British FSA I couldn’t avoid the feeling I missed out on a great opportunity.
When I sat down during the weekend to analyze the situation I noticed several distinct issues I should have addressed earlier.
#1 We should have decided together, in advance, on a sum of money we are willing to risk if the opportunity should present itself and make zero time decisions.
The stock market is no place for indecisive people. There’s not much time to hesitate when you’re going for quick in-and-outs of the market. By the time the opportunity presents itself it’s already gone.
It takes time to liquidate the sum you’re willing to risk and to agree to risk it in the first place. This up-coming weekend my wife and I will discuss our strategy for the current crisis. With the stock market responding so violently to everything short-term movements become easier to foresee. It’s a sort of basic Manic-depressive behavior pattern really.
#2 Had I acted on my instincts would I have actually made money?
A valuable lesson is not to cry over spilled milk. It’s even a more valuable lesson to learn that it’s very possible the milk hasn’t really been spilled at all.
When considering short-term investment opportunities and failing to act on them we often find ourselves pondering in retrospect on our wisdom and market divining abilities. It seems that every time we consider gambling on short term market movements and fail to act on it we get the direction right while every time we do act on it for some weird reason we fail.
Needless to say, there’s a bias at play. When we make our move we get to see the actual objective results of our action right in front of us in the shape of a positive or negative return. When we don’t act we simply choose a quote from the paper one or two days later which magically suits our unrealized decision.
Cold logic is a rare necessity and learning how different biases affect our thinking and perception is crucial for market success.
Has I made my move I would have probably managed to sell higher than I bought but I would have also gone through one day of misery until the massive bailout was suggested. Maybe I would have given in and sold just a split second before the markets raced back up?
#3 History teaches us overshooting is as common to the stock markets as to everything else as a part of human nature.
These past two weeks and the weeks to come will provide us with many more examples of manic-depressive overshooting due to bad and good news. This is exactly the meaning of higher volatility. Everyone’s edgy and everything overshoots in reaction.
Overshooting is relatively easy to notice when it happens. The crash of the past week was sure to bring about a wave of optimism due to the massive bail-out planned. Just when it seems it can’t get any worse than it already is the market slings back up (and back down again).
Overshooting also happens on a bigger scale of course as previous crisis have proved. The markets will sling back towards growth. It’s only a matter of time. As I’ve already mentioned my wife and I are going to discuss strategy. I think getting back in slowly will definitely be on the table. I believe the markets have not yet fully realized the affect of the crisis but it’s too risky staying outside the game for too long.