Tuesday, February 13, 2018

Emotional Asymmetry

Most investors think the stock market is a cold, heartless place without emotion.  Not true!  Warren Buffett says the market has two emotions, i.e., fear and greed.  He suggests you should be fearful when others are greedy, but be greedy when others are fearful.  Good advice!

But, those two emotions are not equal in strength.  Fear overwhelms greed for probably 99% of investors.  If I told you the Dow rose 330 points one day and 410 points the next day, you will smile and enjoy the rest of your day.  However, if I told you that the Dow dropped 750 points over the last two days, I would have ruined your day.

In economics, we say that "prices are sticky to the downside."  When inflation hits, retail prices rise quickly.  When deflation hits, retail prices fall slowly.  There is no symmetry.  The greed vs. fear emotions are similar.  Greed is tantalizing, while fear is crippling.  There is no symmetry to those emotions.

If you are one of those who are crippled by fear -- first, recognize and accept that you have this problem.  Talk with your financial advisor.  Don't wait for him to call you.  Keep your eyes on the long term, not the daily fluctuations of the market. 

Then, take your spouse to the movies.