The enemies

Stock markets are pretty good barometers. Sure, earnings, events, politics, technology, the economy and loads of data drive prices. But even more powerful are emotions. Investors are people. People are slaves to their nature. We do most things as a result of two sentiments. Greed. Or fear. Of those two, hands down, fear dominates.

People generally buy stuff when they’re confident and, well, greedy. Fear fuels selling. And turtling.  Both emotions can override all else. In 2021, greed made people buy houses they couldn’t afford because real estate always goes up. Fear made depositors start a run on the assets of Silicon Valley Bank because they smelled trouble – which their own actions guaranteed.

By the way, here’s the market fear/greed index (thanks to CNN Business) as of this morning:

How is this arrived at?

It’s complicated. The needle above represents volatility, as measured in part by the VIX. It’s been spiking lately. No wonder. Also taken into account is market momentum, measured by indices like the S&P 500 and its moving averages (over 50, 100, 125 or 200 days). Add in the number of new highs and lows being set by individual stocks (called price strength). Plus the volume of puts and calls as investors place bets. Additionally, the gauge measures the inflow of capital to safe assets, like government bonds, and out of equities. Throw some teriyaki sauce over it all and, voila!, the index is made.

So how shall we deal with this heightened level of uncertainty, doubt and fear?

Essentially by ignoring it. Investor sentiment is meaningful if you buy and sell stocks on a daily basis, trying to make bank on mispricings, speculation or because you’re the smartest guy in the room (you’re not). On a longer-term basis, the impact of emotion on markets is meaningless. What matters more is the economy, which determines corporate performance and is impacted by interest rates, trade, fiscal policy and stuff you can never influence nor be certain of.

The best rules never change. Invest when you have money. Stay invested. Let time do the heavy lifting. The longer you have, the better you will do. Start immediately. Ignore the news. Never watch BNN. Or listen to people like Jim Rogers, Jeremy Grantham or David Rosenberg. They make suicide seem like a fun thing.

Most people, sadly, are paralyzed by feelings.

A Scotia survey the other day found 55% of Canadians polled said they were stressed because retirement plans were “impacted by current economic conditions.” Almost 60% said they felt negative and worried about their investments. Three in four of us have no kind of written or structured financial plan.

Odds are these folks have self-paralyzed. They worry markets may go down, so they stop investing (instead of putting money in now when things cost less). They eschew RRSPs and TFSAs reaping the benefits of taxless long-term growth, or put money into GICs paying 5% (full taxable) when inflation is 6%.

There’s only one reason to explain this behaviour. Fear. It’s on glorious display daily in this blog’s comments section. When markets fall, people assume they’re going to zero. Instead of finding assets more attractive because they cost less, folks find them terrifying because they’re not going up. Ditto with real estate. When prices peak, so do sales volumes. When it takes 30% less money to buy the same real estate, buyers run for cover.

Emotions are not your friends. They blind judgment, poison rationality, irritate your spouse and lead to an uncertain outcome. It’s precisely why so many buy high and sell low, or never buy at all.

Besides, emotions just tanked a few financial institutions. Without fear there would never be a bank run. And no collapse.

Later this week we’ll ask: what if it happened here?

In the meantime, chill.

About the picture: “Recent visit to Red Deer-to see the grand dogs,” writes the Blog Dog known as Dharma Bum. “Foreground River (Shepherd Belgian Malenois mix), Sunny (Husky Shepherd Lab mix) and in the background, a foster, Dutchess (German Shepherd). Cozy.”