General Manager at wealth management consultancy Financial Partners
"The one thing I can predict with some confidence is that investors !V the pack name for which is !§the herd!‥ !V will overreact to events, whether positive or negative."
In tune with the whims of Mr Market 06/10/2008
The one thing I can predict with some confidence is that investors !V the pack name for which is !§the herd!‥ !V will overreact to events, whether positive or negative.
This means that one of the most valuable tools for investors is to develop the critical thinking that allows them to separate from the herd at times when the pack is heading for the cliff-edge.
The current credit crisis has a little more !§systemic risk!‥ in it for comfort.
Is the system changing? We were buying into a !§capitalistic model,!‥ weren!|t we? If so, does the US government buying around 80 percent of AIG represent a turn towards socialism?
I prefer Peter Land!|s view at Brewin Dolphin, that !§the Fed has simply become a huge hedge fund manager.!‥
The current herd instinct will have justifiable concern if the entire system, the one in which private enterprise, laissez-faire regulation, and globalization is replaced by something else.
This assumes that the !§clerical errors!‥ that allowed the credit-credit crunch to take root are Tipexed-out, and eventually repaired.
On this basis, we open the door to Mr Market. Warren Buffett uses !§Mr Market!‥ as a reference point for market behavior; the behavior of the herd. There are probably four components of Mr Market!|s personality that have some picture-painting value.
Personality trait number one: Mr Market is a servant; not a guide. Trouble can be encountered when we follow Mr Market everywhere he goes. He is prone to extremes of personality disorder. However, for most of the time, he is rational.
For the most part, it is unwise to bet against the herd. As a servant he provides investors with a !§fair value!‥ for pricing stocks and he produces widely acceptable methods of valuation.
The second and third elements of this personality-watch occur when Mr Market enters into his periods of extreme enthusiasm or extreme depression. This is when critical thinking is needed.
Did Mr Market go overboard during last week? Or, is he understandably excitable today and likely to go over-board shortly?
Current market prices indicate that Mr. Market is close to !§depression-mode.!‥
In other historical depressions, you could expect the market to be up significantly within a year or two.
The contrarians, with their critical thinking, will read the sentiment factor and buy. Saving regularly? That time is today/tomorrow.
The fourth element of Mr Market!|s personality-watch: his friend, Mr Media. Mr Media is influenced by Mr Market!|s temperament swings. Prices !§surge!‥ when Mr Market exudes enthusiasm, and they !§crash!‥ with Mr Market!|s depression. The problem, of course, is that newspapers need to print news. News and insight are two different things. Today!|s price and tomorrow!|s potential are two different things.
Today!|s inward investment is tomorrow!|s growth story !V this means that investing in a market today should be influenced by two things: today!|s price !V is it too high or is it low?; and is it a buying opportunity compared to where it will be when everything is stable?
Today, with the press blaring out negativity, it is easy to see why the herd has set off for the cliff. The credit crunch gives them good reason to be scared. Yet it will probably resolve itself and, as soon as Mr Market senses this, his enthusiasm will return.
Returning with him is less rewarding than returning before him.
