Navigating Market Cycles: A Man Has Got To Know His Limitations

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).

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

Visit: Random Roger

Be the first to comment

Leave a Reply

Your email address will not be published.