Prepare for the bear (maybe)
Here we go again. A double dip? A triple dip?
We have been here before[1].
It reminds me of July 2002, October 2002 and April 2003 when we hit triple bottoms in the stock market lopping off a staggering 47.8%, 49.2% and 47.6% respectively, off the S&P 500. With a 16% decline in the S&P 500 since its recent high on April 23rd, I feel there is too much bearishness and pessimism out there amongst advisers and investors alike. A decline to 20% or more will be described as an interim bear market by the market pundits. A sell on the S&P 500 has been issued by the chartists following the 12 month simple moving average (SMA) of the S&P 500.
The (unpopular) case for Europe.
What about investing in Europe? … the room empties as the crowd shuffles for the exits…
There is no doubt that Europe has been in the headlines for several months; Greek debt crisis, sovereign debt crisis, plummeting Eurodollar, etc have all become regular news items.
No one is interested in Europe these days. It is unwanted, unloved and is out of favour with investors.
Prices are approaching last year’s lows. Which means it is starting to appear on my radar screens.
If you wish to see a sole voice in the wilderness, click on John Arnold’s[2] dogged but impassioned video interview here: http://www.clientinsights.ca/video/john-arnold-agf-european-equity-class/type:investor
If you are a contrarian (going against the popular view) type of investor and if you do wish to invest in John Arnold’s AGF European Equity Fund then a systematic investment approach may work best, i.e. invest $500/month for a year.
Behavioral finance - Post Traumatic Stress Syndrome etc.
By late April 2010, the U.S stock market had rocketed up almost 80% from last year’s low with no hint of the usual and quite normal pullback in prices along the way. The market kept going and going….until this May and June and suddenly we had what is known in the trade – a technical correction. If we take a look at a major stock market index like the S&P 500, this benchmark index of America’s 500 biggest companies dropped about 13.7% by early June and ended the month with a total 16% decline.
And investors are not much liking it – at all. The battle hardened investor who survived the market downturns of late 2008 and early 2009 is still nervous and likely to bolt at the first signs of distress.
As we are all too human, we refuse to buy as prices are declining as we are hardwired to extrapolate the most current trend. If the current trend is down, then naturally it will go down more. Conversely if markets are going up quickly, then naturally it will go a lot higher. Sell low, buy high. – the exact opposite of what any consumer would normally do. Which is why the average equity mutual fund investor underperforms their own investments even over long periods of time[3].
Another behavioral mistake often refers to “anchors” or “anchoring”. For illustration sake, if our account had a value of say, $100,000 at the tippy-top of the market in April, the value of the account (presuming we had invested in the S&P 500), would be approximately $86,300 by early June - a 13.7% drop on paper. We have to recall that the value of our hypothetical account 16 months ago on March 9th 2009, was $55,555. So the question is; did we “make” $30,745 or did we “lose” $13,700. Good question because both answers are correct! The ever changing numbers depend on what time frame you are measuring. We tend to put the most weight (anchor) on the most recent event – the smaller short term loss outweighing the larger but longer term gain.
Therefore, some investors tend to obsess about their last investment statement by comparing it to the previous month in order to judge if it was a good or bad month. This is certainly the first sign of being susceptible to the BIG MISTAKE and why many investors tend to flail around at market highs or lows. Writers often use the term “irrational investor behavior” however a better term would be to use Prof. Dan Ariely’s term, “predictably irrational”. If behaviors (especially inappropriate ones) can be predicted then perhaps we can do something about them.
In my view, timing and investment selection only makes up 10% of real life investment returns. The other 90% is investor behavior – what we do with our investments after we bought them is the primary determinant of investor success.
[1] http://dshort.com/charts/bear-recoveries.html?00-02-recovery
[2] John Arnold, Chief Investment Officer and Managing Director of AGF International Advisors Company Limited
[3] http://dalbar.com/Portals/dalbar/cache/News/PressReleases/pressrelease20100331.pdf
