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Fear & Greed Trader
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Independent Financial Advisor / Professional Investor- with over 25 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • The "Negative Bias"  7 comments
    Feb 11, 2014 12:47 PM

    During the recent dip in the equity market , the "doomers" were in full bloom as article after article abounded explaining to us all how the dip/correction will be destructive , causing "pain" and how we are now ready to embark into a new "bear" market ...

    Ever wonder why they all come out when there is increased volatility , with a wild swing to the downside as their pulpit to warn us all that the market is about to crater.. ? at times its Fascinating to watch.....

    I've stated this comment a few times here on SA and in my blog. " Pessimism is intellectually seductive and the arguments always sound smarter, especially when they dovetail with our own worries. " Maybe its time to take a closer look at that ...

    Investors are quite fickle. If there's one thing you can pretty much count on from many, it's that things are never really good enough. Many by default seem to focus excessively on the negatives in our lives at all times. Yes how many times have they said "the economy is terrible, how we're in a "recession/depression" or how we're right on the verge of sinking into the abyss that we came close to falling into in 2008. The compulsion by many to focus on the negative seems to be the result of a natural bias of human behavior - negativity basis. Most Psychologists will explain that it can be extremely destructive if it's not understood and dealt with properly.

    A few thoughts that I gleaned from a recent report that was presented to me by Pragma Capital.

    Negativity bias is the tendency to emphasize and recall negative events relative to positive events. That is, fear of bad events plays a much more substantial role in our thought processes than positive events. It's a natural evolutionary bias - we fear that which can harm us. And when it comes to financial markets and economics we tend to see this bias in spades. Just look at the last 5 years of economic recovery during which negativity seems to have swept over the economic outlook with alarming regularity.

    We surely have been in a slow growth , muddle through recovery.. But it's also not the nightmare that the mainstream media and doom and gloomers sometimes imply. In fact, there's a fair amount of good stuff that's gone on in the last 5 years.

    The point is, it's a good thing that we often focus on the negatives in our world. That makes us more likely to make improvements, resolve problems and avoid the same problems in the future. But when we analyze the current state of affairs we have to also avoid falling victim to our negativity bias.

    An excessive focus on the negatives in our financial markets will generally lead one to fall into the trap of believing that things are actually much worse than they really are. And that can lead to very bad decisions. Instead, it's better to understand this bias and try to analyze the economy and the financial markets with a more balanced and pragmatic perspective. For example I have suggested numerous times to watch "price action" . Also commenting that if I had only one metric to choose to make my decisions it would be EARNINGS ... These are examples of looking at things in a fair and balanced way. That will help you understand the problems we face without falling into the trap of focusing so much on the negatives where many wind up thinking that the end of the world is always around the corner.

    This negativity bias is pervasive in the community of naysayers that have held the belief that the next crash is around the corner from S & P 1300 to the present and it has cost them dearly ..

    One can "talk" themselves into buying a bunker , or telling us all how & when the market will crater because of THEIR data.. While remarkably, for all to see, Mr Market is using another set of facts and showing them a different result.. a result that they are still disputing.....

    Instead, why not be primarily concerned about things within our control. Markets correct, volatility happens. The key takeaway is to stay focused on what is within your ability to manage - portfolio allocation, how much we contribute toward retirement, how much debt we accumulate. Time spent on things beyond our control is wasted.

    Entertaining the thoughts of those that are clearly in a negative basis mindset and continue to repeatedly demonstrate that mindset, is also time wasted..

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Comments (7)
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  • User 7415181
    , contributor
    Comments (1032) | Send Message
     
    I like this article. Had a laundry list of cefs to buy this week - sold off a preferred today and took a profit and a few dividends along the way. Bought into (TTP) and (BWG). A month ago that preferred was much further down than it is currently. And I still have another purchase to make come this Friday.

     

    Yes, I have had the "things bad boo-boo" mentality since the beginning of the year. And based on past experiences, this is why I developed my own set of rules and force myself to stick with them. And it is quite difficult, but it seems to work.
    11 Feb 2014, 01:12 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10274) | Send Message
     
    Author’s reply » User,

     

    having discipline and sticking to a plan is very difficult for many investors,, myself included..

     

    Particularly now with the abundance of news one can get on the internet , etc..

     

    It's a fine line between losing the negativity bias and having rose colored glasses though , so for me its a balancing act .

     

    My experience has taught me to now err on the cautious side , but not to the extent of giving up on opportunity.. another fine line :)

     

    Thanks for the comment , good luck
    11 Feb 2014, 01:21 PM Reply Like
  • Augie91
    , contributor
    Comments (341) | Send Message
     
    Thanks, as always, for the levelheaded comments. We certainly are creatures that like to get one another riled up. The sky though, as is usually the case, is not falling! Never been much for drama myself either. Would be curious to know how much "dry powder" you feel one should be holding now for future correction buys? Please keep posting your thoughts, particularly your opinions on where to invest. Blessings :)
    11 Feb 2014, 01:28 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10274) | Send Message
     
    Author’s reply » Augie,,

     

    a lot of course depends on a person's tolerance for risk , one's age , station in life ,etc.

     

    I'm 64, semi- retired.. & I can handle "risk" pretty well,
    given that I'm at 15% cash... I still feel the chance for a correction of 10-15% is there..

     

    Just picking spots , not being overly aggressive here and collecting dividends... :)
    11 Feb 2014, 02:12 PM Reply Like
  • User 7415181
    , contributor
    Comments (1032) | Send Message
     
    Cautious? Don't know. My gut reaction over the last month or so has been to move to cash and then go into hibernation mode. I would call that cautious (or fearful), but I haven't done that - I stick with my plan of setting limit sell orders for approximately a 10% gain on positions that already pay a hefty dividend. Some of said positions are way down from when I bought them, but I try to make sure in advance they're not likely to go bankrupt anytime soon.

     

    I was told by a co-worker last week that I could make a wet dream seem bad. I don't think I'm in danger of rose colored glasses yet. :)
    11 Feb 2014, 01:34 PM Reply Like
  • BlueSkyForever
    , contributor
    Comments (2964) | Send Message
     
    With all the good signs that are out there, it is hard to understand the doom & gloomers. If they would just stay in their bunkers….lol.

     

    Back when I was selling real estate, it became imperative to be an upbeat person - or lose sales. Who wants to buy a house from a cranky lady that keeps talking about how bad the economy is??

     

    Just before Christmas last December, we went to a mall in NJ, and it really helped me to see that things aren't that bad. People were smiling, enjoying shopping. At Costco, seeing people with their carts full, long lines at the check out helps. That happens almost every day.

     

    If you are surrounded by grumpy people, it is harder.

     

    Life is what you make it. Even down days (or months) on the market can be opportunities.
    11 Feb 2014, 03:16 PM Reply Like
  • Fear & Greed Trader
    , contributor
    Comments (10274) | Send Message
     
    Author’s reply » Blue,
    "Life is what you make it. Even down days (or months) on the market can be opportunities"

     

    Well said, I was once told that having an "optimistic view" as a default setting is THE ONLY way to successfully fund your financial goals over the long term...
    11 Feb 2014, 03:24 PM Reply Like
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