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As a young child, my mom shared with my siblings and me the fable titled, “The Sky is Falling.” This is a great story about Henny Penny, a chicken, who gets hit on the head with an acorn while eating her lunch and concludes that a piece of the sky has fallen. Henny Penny decides she must alert the King of this critical information. Along the way, she comes across other animals, such as Cocky Locky and Goosey Loosey, and convinces them of the imminent danger. They decide to join Henny Penny’s expedition and forewarn others of the risk. En route, the swarm of believers meets up with Foxy Loxy who is ruthless and takes advantage of the fear and panic in the crowd.
I guess that years ago it was completely acceptable in a children’s story to have characters eaten by other dishonest creatures.
After nine straight weeks of gains, the market decided to reverse its course in the second and third weeks of May. This market upswing seemingly came as an utter surprise to many investors, considering that just a short while ago many of these same investors were of the strong Henny Penny belief system that stock prices would never, ever rise again.
The rally then began again roughly one week later. Many stocks posted historical low price levels on March 9, 2009, and since that time have recorded incredible gains. At the time this article was written, the S&P 500 had returned 32.92% (gross dividends reinvested into the index) from the low on March 9. “So,” I ask, “why aren’t more investors pleased with the positive market returns?” Most likely because stock prices are still down roughly 40 percent from their peak in 2007.
Many investors are agitated because they missed out on the gains. They define personal financial planning as trying to time the market, or chasing the latest stock or sector. Fear and greed are behavioral emotions used by many in their investing habits. Overwhelming fear pushed many investors to the sidelines. Investing in low-rate certificates of deposit were people who bought into the doom and gloom that prevailed throughout the early months of 2009. These are the investors (Henny Penny, Cocky Locky and Goosey Loosey) who got on the bandwagon and were convinced that the sky was falling.
If fear and greed are the defining emotions of investing, then there is nothing like a missed opportunity to bring out the greed. So many investors who accepted as true the doomsday picture were unwilling to accept that stocks would recover anytime soon. Loads of money bet against the market ended up in negative-returning U.S. Treasuries and cash. The lemmings were all happy with their “perceived” riskless actions. For some it was no longer a matter of the market rising and/or falling. These investors could no longer stomach a plummeting stock market and needed to bail to finally sleep at night.
These are times when rational investors should go against the grain. The point is that no one is right all the time, and there is no way to predict when a market will make a turndown and/or turnaround. These recent market gyrations were an important learning experience for anyone who deviates from rational investing and gets caught up in emotions. In my 16 years of investing experience, decisions based on emotion usually always turn into mistakes. Keep in mind that the rational decision is often the opposite of the emotionally based decision. Thoughtful long-term investors recognize that problems get solved. The economy can and does sputter along even though banks fail, insurance businesses close, car companies file bankruptcy and other entities fall like acorns. The truth is acorns are pulled down by gravity and markets fluctuate. On a short-term basis anyone can use information to his or her advantage or disadvantage to appear either smart or not so smart.
In 2009, FIM Group celebrates 25 years of investing. We are and have always been long-term investors. We do not speculate the longterm security of our clients, and we try never to be guided by fear.
The moral of the fable is to be wary of all the Henny Pennys in the marketplace and watch out for mass hysteria conclusions. I am not asking you to necessarily become an unscrupulous fox. Rather, I am suggesting that you should have thegood sense to recognize that making decisions outside of the masses can often lead to more positive outcomes.
To learn more please visit www.FIMG.net or call 800-632-5528.
