As investors we hate ambiguity, we want certainty, which is why we dislike the idea of randomness. We want our advisors / managers to know exactly what is going on. Financial experts must speak confidently and explain what is driving markets. Every day you will hear a “confident” market commentator explain why the stock market went up or down for that day.
What you don’t want to hear from your financial advisor is that he or she had absolutely no idea why market went up or down for the day. This is why we mistakenly focus on the latest event in an attempt to explain / rationalize the markets movement for day. Truth is it is chaos out there. The very same share can go up 3% in the morning and then 5% down again in the afternoon, for no plausible reason. Top forecasters never win and award twice in a row, the best they can hope for is to get it approximately right.
Investors need to overcome their inherent aversion to ambiguity. Expect surprizes, nobody really knows. Yet we spend vast amounts of money on trying to forecast the future. Ironically even if you could accurately predict an event or occurrence, how the market reacts is anyone’s guess. Therefore it is unlikely you would be able to profit from your information, even if you did know.
Humans are emotional beings; we are switched on the whole time. This probably has something to do with our prehistoric days when our emotional response or reaction was the difference between being lunch and having lunch; your fight or flight response to a threat or opportunity. Nowadays the threat of risk of losing or the opportunity of making money on the stock market produces the same emotive response, overriding our rational thought process. This is why it is so difficult to be contrarian or “swim upstream” it is counter intuitive to our instincts, we are more comfortable following the “herd”.
Investors prefer to buy shares when the price is rising and sell shares when the price is falling, which is typical herd behaviour. By buying when everyone else is buying we avoid the risk of being different and thus wrong on our own. We take comfort in knowing that if we are wrong then everyone else is also wrong. This is irrational investor behaviour.
“An investor who has all the answers doesn’t even understand the question” Sir John Templeton.
Mcomm, CFP®, HdipTax
T. 021-851 3746