The stock market abounds with colorful sayings that reflect the collective wisdom of decades of investment experience. For professional investors, these time-worn adages are reminders of sometimes-painful past market episodes and the unending challenge of getting the future right. But at the end of the day, can these slogans actually be useful in making investment decisions?
Yes, in that what makes the stock market both so confounding and fascinating is how human behavior and emotion influence investment decisions. The wisdom in these sayings is that they remind us of this influence. Considering Mark Twain’s famous quote that “history doesn’t repeat itself, but it often rhymes,” we believe it unwise to let this past wisdom go unheeded when investors are faced with important decisions.
Below is a list of some of the more intriguing slogans that professional investors often cite, and an explanation of their meanings.
Some of these catchphrases are backward-looking and of little value (“the easy money has been made”). Some highlight the comfort that comes from following the talking heads on TV (“the smart money is buying…….”), while others remind us of the perils of ignoring history (“it’s different this time”). But perhaps the best slogan that captures the real influence that human behavior has on the market is the following quote from Sir John Templeton:
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
Fighting the impulse to do the exact opposite of this maxim is what is so difficult to do, and is what oftentimes separates the great investors from the rest.
Experience is what gives the good investors the fortitude to stick with this strategy while most of human behavior and impulse argues against. As advisors, our job is to recognize when these tendencies of human behavior are present, and do our best to avoid them. It’s also our role to help our clients recognize these tendencies in their own behavior, so they can understand how easily they can become derailed from a plan to stick to a carefully-conceived investment strategy.
While these slogans are important to keep in mind, the best investment strategy is one that incorporates reasonable expectations for future market returns and establishes guardrails to avoid being swept up by the emotion that inhibits investment success.
Learn more about Bruce D. Simon.
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The information in this report is deemed to be reliable but has not been independently verified. Some of the conclusions in this report are intended to be generalizations. The specific circumstances of an individual’s situation may require advice that is different from that reflected in this report. Furthermore, the advice reflected in this report is based on our opinion, and our opinion may change as new information becomes available.
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