Don’t trust your gut.
One year ago, almost everyone was panicking. Stock markets were hitting new lows–more than 50% below all-time highs of fall 2007. Bankruptcy risk seemed to be around every corner with rumors flying about which companies would die next. Additional rumors were floating that the government would be taking over large banks like Citigroup and Bank of America. The fear was palpable.
Today, the S&P 500 is up around 75% (it still needs to climb another 35% to get back to Fall 2007 highs). Emerging markets and some commodities are up even more. The banks everyone thought would be taken over, Citigroup and Bank of America, are up 289% and 436%, respectively. Everyone is starting to feel calm again.
So, what have we learned? Trusting your gut feel to guide your decision to invest or not works terribly. Investing when it feels like the sky is falling is excruciatingly difficult, but generates the highest returns. Intestinal fortitude–having the courage of your conviction–is as important as sound analysis.
Or, as Warren Buffett put it: 1) you pay a high price for a cheery consensus, and 2) if you wait for the robins, spring will be over. Waiting until things feels good is a guaranteed trip to poor or mediocre returns. If you wait until you feel good, it’ll be too late.
With this in mind, where are we now? Investors piled into cash and bonds last year–precisely when they should have been buying equities. Now that the market and economy have recovered, they’re finally starting to buy equities, again.
Knowing how the stock market and human psychology works, I expect the stock market to continue creeping up until everyone is on the bandwagon. Once they are, and fund flows into mutual funds are hitting new highs again, and everyone feels nice and comfortable, it will be time for another drop.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.