As part of his personal finance column in the IMT, John O’Connor talks about the Stock Market, emotional investing and Time vs Timing..
I watched the Ryder Cup last week with the usual pent up excitement and anticipation that it brings every 2 years. It’s one of the few golf Sundays that many of us reserve for the couch and look forward to nail-biting episodes of drama and anticipation as 24 anxious men do battle to bring home a small gold cup.
The predictions before the event tend to be spread broad and wide and add to the anticipation of the match itself. The post event analysis of those predictions tend to be even more entertaining as some of our friends try to row back from their original projections and others enjoy the glory of their correct prophecy. Once the result is known however most of us tend to feel that end result was always on the cards if we had only just thought about it more carefully!
I am not suggesting that investing our pensions in stock markets should be treated with the same amateur analytics by the investor, but when markets go sour the look-back evaluation always identifies a number of clues that what was about to happen was coming, we just didn’t see it before-hand.
We have all read the headlines lately about how some stock markets are at all-time highs and we have seen the longest bull run in America’s history – which would lead us all to be wary of stock market investing over the short term. The difficulty at present is that for every highly qualified and reputable doom and gloom economic predictor there is an equally respected view that says markets are not over valued and the reason why we have had such a long bull run is because it fell so low 10 years ago that it is only catching up with itself.
Emotional Investing While emotional states are relatively unquantifiable, from experience I am inclined to believe that a successful investment return over time brings an Irish investor an element of happiness that could be described as a ‘spirit lifter’. It would be quite rare that you would hear an investor say ‘I knew that was a good idea’ or ‘I had that all worked out and reckoned that would happen’. More often I tend to hear more modest responses along the lines of ‘Gosh it’s good to hear good news, I never make any money like that’ (even though their portfolio is flying!) or ‘I’m delighted to hear that has gone up, please god it’ll stay that way’.
One thing is for certain though and that is when markets fall and investors see a downturn in their investment they are in a much more emotive state. I would estimate that a fall in value for an Irish investor will lead to an emotional negative that is 3 to 4 times more impactful than a gain equal to the same amount will impact. This can often lead to us moving away from equity investing when in actual fact we should be holding on and riding out the downturn until things change and become more positive again.
The difficulty in riding out a downturn is always that we do not know how long it is going to last or bad it is going to be. In addition, we look at our pension and investment funds much more often during negative stretches than we do during positive times. We also take in much more media analysis which can give frightening commentary, bringing us to an even more negative state and encouraging us to offload our exposure and run to safety. It is a downward spiral that leads us to maximising our potential losses, leaving the upside gains to be made by the bold investors who decide that downturns give opportunity for greater gains rather than crystallising losses.
Time Not Timing The value-based investment model tries to avoid market fads and trends and buys stock in good companies that are undervalued and holds on to it for the long run. This involves investing over time and not being dependent on market timings. When we look at the performance of the MSCI world index over the last 15 years we can see the highs and lows that the markets have endured. If we had remained invested during the whole period we would have done quite well as you can see. Had we become frustrated in 2008 at a net zero performance for the previous eight years and stepped out we would have lost all of the gains that were to be made over the next 8 years. Of course if we had executed our timings of entry and exit perfectly, we would have done even better but if we had exited in 2008 we would have done a whole lot worse.
So while we look on the Ryder Cup with a short term strategy, assessing who will win every two years, we can feel fairly certain that while it will suffer its ups and downs over our lifetimes, it is likely to strive on and will be back in 24 month’s time. Maybe a similar attitude to the stock market and long term investing would do us too.
By John O’Connor MD, Omega Financial Management