Anchors A-weigh!
In these uncertain times, as the Covid-19 virus moves across the planet, we’re seeing markets yo-yoing with wild price fluctuations on almost a daily basis. Jumps or falls of over 5% are commonplace. This is not normal market behaviour.
Adrift
Well, right now, markets have weighed anchor and investors are afloat and adrift in stormy seas. This has a range of perverse consequences, which themselves contribute to the ensuring volatility. Above all we don’t want to find ourselves aground, with losses mounting and no way of alleviating the pain. With anchors there are – at least – three areas that investors should be wary of.
Secondly, people will tend to anchor on the prices they bought at. Again, these may no longer be sensible – there are a lot of growth stocks out there that are no longer growing. Whether or not those still have much value is dependent on a whole host of things, many of which aren’t in the realm of rational analysis. There’s a point at which investing shades into gambling.
When anchors get weighed people cast about for new places to land them, and that leads to other sorts of odd behaviour. Typically you’ll markets zigging and zagging as news pushes them one way or another and the herd follows the trend. Herding is a typical bear market phenomenon – we see it in investors but also in analysts. Normally analysts rely heavily on companies to give them their take on the future – when companies have no idea then neither have analysts; makes you wonder whether they ever add any value, doesn’t it?
Well, don’t be too sure. In 1973/74 the UK market saw an unprecedented 70% plus fall due to the oil crisis, an associated run on banks and some fairly stupid government behaviour. In 50 Years of Capitalism At Work John Littlewood wrote about the end of 1973/74 crash thus:
“[The eight weeks that followed the end of the crash] amount to the most astonishing single period in the post-war history of the stock market, although few investors would admit to having enjoyed this frenzied feast while it was happening. Many simply looked on, paralysed like rabbits caught in the headlights … Far too many institutions had husbanded their cash resources for sunnier days, complacently believing that the time would come when wonderful buying opportunities would be there for the taking at their leisure. In the event, these wonderful opportunities vanished like melting snow in a sudden thaw …
… Perhaps the greatest psychological effect was inflicted on private investors. Many had sold on the way down; others who sat through the recovery were now disillusioned beyond repair and never wished to own a share again”
Go-Go Gurus
Other behavioural biases kick in during these scary downtrends. You’ll find people plaintively asking their gurus for guidance – and guidance there will be aplenty … but when the blind are leading the blind in a landscape with canyons and crevasses galore the results often aren’t pretty. Deferral to experts is an understandable response to scary situations but whereas listening to the medical experts is a sensible strategy – because they’ll actual experts with qualifications to show it – it is not an intelligent response to defer to people who have real expertise in anything other than talking persuasively – which is the stock in trade of most stock advisers and politicians.
It’s very easy to get lost when anchors start drifting, but fundamentals and history tell us how to deal with this. Buy stocks with – in normal times – good operating margins and with low amounts of debt. Don’t go all in at any point – that bell you hear ringing is cognitive dissonance, not the bottom of the market: bear markets can last a long time.
Don’t fret that you’re missing out – no one times markets other than by luck – and diversify, regardless of how attractive any particular sector looks right now.Probably markets will eventually anchor at a lower level than pre-Covid-19. It’s a reminder that chasing growth at any price is never a good investment strategy. In the meantime, stay safe.
Source: http://www.psyfitec.com/2020/03/anchors-weigh.html
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