In Raiders of the Lost Ark, Indiana Jones feared snakes. Bry Loyst, proprietor of Indian River Reptile Zoo, is not afraid of snakes. Respectful but not fearful.
What is the difference?
Bry knows more and understands the signs. He knows the tendencies of his creatures and he knows their strengths and their limits. He knows his own. When you know enough, you respect, but do not fear. When you know enough, you can prepare and know when to change behaviour. When you know enough, you are reasonably safe.
Snakes and other reptiles are a rare confrontation for most of us, so we tend not to learn much and react fearfully as the result. Same thing for investors in the stock market.
Sun Life Global Investments conducted a reasonable survey recently. The findings are a little counter-intuitive. You can see the report here.
- Looking forward five years, participants were slightly more pessimistic than optimistic. 42% to 37%
- Same general idea for the stock market. Slightly pessimistic.
- Of all age groups, millennials and Gen X were the most pessimistic.
- Millennials were three times more likely to have sold investments when the market fell than persons over 67. Gen X about twice as likely.
The question becomes why would those with the longest investment time horizon fear volatility? As with fear of reptiles, the answer could be because they do not know enough.
Fear of losing money in the stock market is an ancient brain response. The amygdala a very old part of the brain and is heavily involved with decision making and emotional responses. It is not at all good at logic. Fear is primitive and very powerful. Volatility induces fear, but only when you look. Your higher brain would notice volatility matters only if you are going to take the money back to use for something else, so why look?
A young person who fears the loss of value in their portfolio is not actually understanding the process. You cannot lose “money” in your portfolio. The value could change downwards, but that is not the same thing as losing money. You gave up your money when you bought the assets. What you have is the fractional share of a business and an option to exchange that for money. The stock market values that option, not the assets underlying it. So when the market is down you must ask yourself. “Did the value of my assets fall, or did the market pricing mechanism change?”
Microsoft has in the past 12 months, traded between $56 on the high side and $40 on the low side. It was pretty much the same business throughout. If you sell when it goes down and buy when it is up, you will inevitably lose most of your money.
The same is true for the market taken as a whole. It is made up of businesses. A fraction of a business has value and once people notice the idea of business value, the price will tend to become noise. Notice the difference between price and value.
In 1919 Coca-Cola became a public company at $40 per share. That share with dividends invested, today is worth more than $10 million. The hard part is that a year after issue, in 1920, the shares were worth only about $20 each. I suspect many people sold their shares because they feared a greater loss and few bought because it looked risky. For those who did not look, or bought more because they understood the “business,” life has been good, albeit volatile.
Fear and greed are poor investment advisors. You cannot understand your portfolio by looking at stock prices. It is a fool’s game and a very expensive one. Find a professional to help you learn, so you can manage your amygdala.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772