Have you ever said to yourself, I’d do a lot better if I did the exact opposite of what I always do? As I delve into the behavioral science of investing I find more and more individual investors succumbing to this feeling. However it is not your fault, the problem is most of what you learned about the investment arena is exactly opposite of the way you really need to think and act to be successful. The cause of this is most people get brainwashed because of the herding impulse where you might even consider doing the right thing but the impulse to conform is so great in us that we just end up doing the wrong thing at the wrong time.
Right now the SPX just passed its all-time high intraday who do you think is buying this move? Not the smart money they have been invested months ago and possibly years when everyone else was buying bonds at historical lows or staying in cash. Many fund managers out there who missed the best part of the move as usual are chasing performance right now and this may be part of the markets acceleration. You look pretty stupid if you quarterly client statements have excess cash or over weight in bonds and the headlines announce new all-time highs.
The problem with the individual investor is they chase performance or yield not even contemplating the degree of risk they are taking. In a lot of my new client seminars I compare investing in the market like going to the supermarket and seeing tomatoes selling at 2.75 pound and 1.40 pound. Who pays full sticker price for a car? Most individual investors never consider that they overpay for investments all the time. Then they wonder why the profits are not consistent. Why does this happen is because they have been brainwashed by the herding impulse to fear buying and selling when you are really supposed to do it. Many buy late because they feel an amount of comfort when the news is good. The flip side of this is when news is bad or their engrained perception is bad they will stay on the sidelines.
I will tell you how to fix this in my next communication with a recap of the first quarter and my observations going forward.