Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog, and other drawings are available on his personal Web site, BehaviorGap.com.
Since March 2009, we’ve watched the market rebound by 80 percent. Whether you’ve sat it out on the sidelines or think you can predict what comes next, I recommend you take a step back and remember a few things.
You are not as smart as you think. Overconfidence is a huge behavior
problem for investors. Overconfidence is what happens precisely because we think we know a lot about the subject, but overconfidence can lead us to make mistakes that in hindsight will be glaringly obvious (but the tricky part is that we didn’t know it at the time).Following the herd doesn’t make it safe. I know it’s exciting and fun to be an investor in Apple or Google right now. Then there’s the talk about getting access to the private initial public offering of Facebook through Goldman Sachs. Buying because everyone else is buying is not an investment strategy. These companies may be great investments, but not just because everyone else is buying their stock.
We’re social animals who feel safer in numbers, but so do sheep. We take comfort in doing what everyone else is doing, and in the back of our minds we know that even if we’re wrong, at least we’ll be wrong with a bunch of other people. But it was the same line of thinking that led us to do very stupid things in high school just because “everyone else was doing it.”
Investing is about behavior, not skill. Maybe you’ll accuse me of beating a dead horse, but successful investing is about how you behave. Buying high and selling low is dumb, but it’s worth repeating given what I’m seeing in the market today. It’s important to remember that you could own a “mediocre” mutual fund, and if you behave correctly you can outperform 99 percent of your neighbors. On the other hand, if you spend your whole life searching for the “best” investment, you’ll ruin your entire lifetime return in one single behavioral mistake.
I know that what I’ve outlined sounds obvious and easy to scoff at, but the fact that it’s obvious didn’t keep investors from loading up on tech stocks in the late 1990s, bonds in 2002, and real estate in 2006. As we enter 2011, and the excitement of our financial New Year’s resolution starts to wear off, please remember that it’s worth taking the time to stop and think before you invest.
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Here's David Rosenberg on the total unemployed/ total job opening ratio:
''''Note that there are now a record 6.4 unemployed per job opening — double the highest level posted during the 2001 recession — which is a supply-demand mismatch in the labour market that is sure to accelerate the downtrend in wages (vivid in the NFIB survey too). ''''''
Also, here's what David Rosenberg had to say on the VIX
''''And the VIX index, at 17, is symptomatic of this high level of complacency — it was 22 a month ago and over 40 when the stock market was bottoming last March. The fact that investors are behaving as if there is minimal chance of any possible downside surprises occurring is perhaps the most glaring red flag over this bear market rally — from a contrarian standpoint, the widespread bullishness is bearish. ''''
Even as Gold and Silver have been star outperformers, its just amazing how little coverage they get on CNBC!
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The Stress tests were way off !! They were nowhere stressful enough; no wonder the banks passed with flying colours. The Market Ticker Blog has more. About Those Stress Tests...Lastly here's yesterday's post from The Automatic Earth Blog.
November 5 2009: Here's how to stop the bleeding
Here's an excerpt
Dylan Ratigan in conversation with William Black:
Ratigan: We have legalized the casino gambling with taxpayer money, literally. It is legal for proprietary trading, which is idle speculation, although perhaps well informed and profitable, with the use of taxpayer insured assets.
Black: We not only legalized it, we backstopped it. If you win, it all goes to you, if you lose, it all goes to the taxpayers, and the American people. That is insane. Everybody knows that’s insane."
It's going to take time and a whole lot of hard work to fix this!
