The DOW closed at an all time high today.
I can see how Mr Market is giddy with excitement at the prospect of having all sorts of buyers eagerly lapping up his sales pitch, willing to buy most of the stocks he has for display.
But while Mr Market puts on his charm during this upward market, I am reminded of Howard Marks last memo titled “Ditto”.
You are Missing Out
The first point to go over is that you are missing out on this market upside. Everyone else is making money except you.
In fact, you may have missed out on 7% already.
If at any point during the past few months you thought to yourself “I’m missing out”, then you are not alone. You and I know that investing should be emotionless but are you feeling regret or experiencing pain as you watch from the sidelines?
But it should not matter because regardless of the market direction, our investing behavior should be the same. We should not be taking additional risks, just because the market looks good.
Over the years, I’ve become convinced that fluctuation in investor attitudes toward risk contribute more to major market movements than anything else. I don’t expect this to ever change. – Howard Marks
But, it is at this point where most people crumble and get suckered in to buying stocks that they otherwise would not buy, simply because they do not want to get left behind. Herd mentality isn’t just about buying whatever the next person is buying. Herd mentality exists primarily because of human behavior and getting caught up in emotions.
So are you really missing out? Not at all. That’s what your emotions are telling you. Not what your logic is telling you.
The Cycle in Attitudes towards Risk
I’m sure you have seen the image below.
and to complement this, here is Howard Marks version.
1. When economic growth is slow or negative and markets are weak, most people worry about losing money and disregard the risk of missing opportunities. Only a few stout-hearted contrarians are capable of imaging that improvement is possible.
2. Then the economy shows some signs of life, and corporate earnings begin to move up rather than down.
3. Sooner or later , economic growth takes hold visibly and earnings show surprising gains.
4. This excess of reality over expectations causes security prices to start moving up.
5. Because of those gains – along with the improving economic and coporate news – the average investor realizes that improvement is actually underway. Confidence rises. Investors feel richer and smarter, forget their prior bad experience, and extrapolate the recent progress.
6. Skepticism and caution abate; optimism and aggressiveness take their place.
7. Anyone who’s been sitting out the dance experiences the pain of watching form the sidelines as assets appreciate. The bystanders feel regret and are gradually suckered in.
8. The longer this process goes on, the more enthusiasm for investments rises and resistance subsides. People worry less about losing money and more about missing opportunities.
9. Risk aversion evaporates and invests behave more aggressively. People begin to have difficulty imagining how losses could ever occur.
And so goes the path towards a mania or bubble.
This is NOT a Market Prediction
I have no opinion on whether the market is undervalued or overvalued. The main idea I want you to take away is to not fall victim to feeling like you are missing out. Keep your risk assessment in check and let the market do what the market does.
Invest independent of the market.
In an interview with Monish Pabrai, Pabrai talks about how his fund was down 65% from the peak at one point, but his wife had no clue because his behavior pattern did not change. Even in a really bad year, he was sticking with his principles.
You do not want to be in a place where you go from worrying about missing opportunities to worrying about losing money.