Reading this post from Rortybomb about saving and consumption served as a good reminder that I am not one of the financial world’s great thinkers. I don’t know if Mike at Rortybomb is but I know I am not.
Every market participant has limitations, the sooner people discover their limitations (or some of them anyway) the easier it will be for them to navigate market cycles. A synonym for limitations that I have used before is blindspots. Limitations can be behavioral in nature or blindspots in understanding of certain things. One blindspot of mine was the homebuilder stocks. I never understood the supply and demand dynamics for new homes so I never have owned a homebuilder stock or ETF. An example behavioral blindspots could be the inability to realize (remember) that markets panic down occasionally, like 1997 or 1998, and then come right back and big selling into those is a bad idea (more of a general comment not pertaining to the current bear market).
The bigger tie in could be the idea that it is not bear markets that do people in but their own behavior. Was it Albert Einstein who defined insanity as repeating the same behavior and expecting a different outcome? Investors repeat certain behaviors and get done in by this. I’m not sure they expect different outcomes so much as fear prompts them to sell at the wrong time, greed prompts them to buy at the wrong time and they cannot help it.
I have a lot of conversations along these lines both with clients and acquaintances which leads me to believe that many people struggle with this stuff which is why I write about it a lot. It is consistent with top down theory. The most important part of the top down process is deciding when to be on the defensive in your portfolio or when to be all in. History shows time and again that the best time to be defensive is when the market feels good and the best time to go all in is after big panics when fear is paramount. We have had numerous reminders during this decade of this effect. How difficult is it to sell at the right time or buy at the right time? Not only do people confront their own foibles in this but they also confront “smart people” on TV playing into people fears and greed.
This is not easy stuff. That it is not easy is why my most important decisions are triggered with objective measurements and why I do all that I can to remove emotion from the process. For you, the end user managing your own portfolio I would add in addition to the above that you take bits of process from many sources and create your own process (long running theme).