Investing with Perspective and Purpose
“I like the looks of this one.” When helping my sister buy a car this past weekend, I was quite intrigued by her decision-making process when it came to buying a car. After tirelessly test driving cars all day and educating her on all of the pros and cons of each car, in her mind, the decision rested on a few things: how she liked the looks, the fact that my mom found a penny outside of one of the cars, and the fact that her left eye was beating during one of the test drives; an old Italian superstition that signifies good luck.
This type of emotional buying is much more common in the financial world than you would imagine. Many people sell stocks out of fear or buy them for fear of missing out (FOMO). This type of emotional rollercoaster is what helps feed the sporadic nature of the stock market in the short term. Being a currency trader back in college and analyzing market movements through chart patterns, I realized that the short-term volatility was not always based off of the strength of the currency itself, contrary to popular belief. Instead, the majority of the movements were actually rooted simply in how people felt about the currency, which as we know can be based on nothing more than a beating of an eye. People’s emotions are what cause all of the “noise” that we see every day in the markets which distorts our perception of how the actual currency is doing. The same is true for the stock market.
In the end, markets are simply made up of humans who often times make decisions not rooted in logic or fact. This is why it is impossible to time the market. The good thing is that the businesses that are at the heart of the stock market, are typically logical and follow a fairly simple trajectory that, based on historical records, eventually drive the markets as a whole upwards over a good period of time. This is why you have to be in it for the long haul with equities. It takes time for all of the businesses’ true successes and failures to push through all of the noise that the news, your friends, and superstitions create. As one of the greatest investors of all time, Warren Buffett said, “the stock market serves as a relocation center at which money is moved from the active to the patient.”
As a martial arts instructor, I would never advise against listening to your gut and making quick decisions based off of emotions as they are meant to protect you; however, when it comes to non-life or death situations, your emotions can often times lead you astray. It’s important to incorporate that feeling into a rational thought process before finalizing a decision when it comes to these important multifaceted decisions. Too many people forget to actually utilize their higher thinking when it comes to investing and thus producing the gap between investment returns and investor returns. All too often, there is a significant gap between the performance of a stock fund and the performance of the average investor in that stock fund.
How is that possible? This is because a lot of people make impulse decisions to buy and sell in attempts to beat or time the market, which leads to them seeing worse returns had they just left money in there and not touched it. Investment decisions, just like analyzing the reliability of a car, should be based off of a long running history in order to have probability and statistics on your side. Now we know that history does not dictate the future; however, it is a much surer way of investing than basing decisions off of someone scaring you to action on the news or the fact that you found a penny when you walked into the Apple store today. Make sure that you have a clear purpose for your investments and verify that they are in alignment with the goals and priorities that you have set in your life and then stick to it. Don’t let your left eye beating drive your investment strategy or your next car purchase for that matter, but good luck trying to convince my Italian mother.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.