Warren Buffett once said; “Be fearful when others are greedy and be greedy when others are fearful”.
I love this statement as it is so simple and yet so apt. For me it encapsulates how we should behave as investors, not all the time but at important moments in time when markets look fragile and when markets are exuberant – they certainly have appeared fragile of late.
INVESTOR BEHAVIOUR
There are many reasons for making an investment decision based on fear. I can see that predominantly we are fed the worst case scenario by our media outlets and we can only too easily imagine how the world can fall apart and what impact that will have on our own personal financial security.
Human beings have only survived by having a strong sense of fear or an alertness to risk and that is still inherently part of our make-up! Many thousands of years ago hunter-gatherers needed a keen sense of fear to avoid being prey to a myriad of ferocious creatures – after all we can only die once and fear helps us avoid dying and that instinct is very much hard wired into us!
Of course, it is tough to be unemotional about losing money even if we know or strongly suspect that the loss isn’t permanent!
Fear of loss is a much stronger emotion than a desire for gain so fear often wins out as we would rather miss out on any gains, no matter how stellar, than suffer very significant losses. For this reason we ask our clients about their appetite for investment risk and construct a portfolio accordingly but we recognise the importance of actually taking risk and the damaging effect of not taking enough risk.
As an investor we are entitled to be a little sensitive to the constant bad news and in the last couple of years there has been plenty of it – to name a few: Covid, supply chain problems, lockdowns, inflation, cost of living crisis, high fuels costs, war in Ukraine and now a conflict in the Middle East.
IS IT ALL DOOM & GLOOM?
It most certainly isn’t.
Statistics do show us that, over time, investors or people that take risk are rewarded. Clearly we are not asking our clients to take inordinate levels of risk but from time to time investments can disappoint but it is worth remembering that they can also surprise in a very positive way too!
We can sometimes think that right now (unlike any time ever before) that investments will never recover but that has never been the case in the past, investments have always recovered.
So where are we now in terms of our confidence and our expectations for the future of any investment? I am confident that we find ourselves in a normal market cycle of ups and downs. In more rational times investors talk sensibly about gains and losses but when markets are constantly under pressure it does take some courage to ignore the fear of losses and hold on to investments that in more normal times we all know will undoubtedly recover – it is just a function of time.
Volatility is unsettling, falling markets can seem unceasing but those fluctuations or price corrections, can actually work in your favour and the fund managers will be looking to keep the shares that have their absolute confidence and buy the shares or assets that the market has mis-priced.
THE EMOTIONAL CYCLE OF AN INVESTOR
Whilst I do not agree specifically with the exact terminology, I do agree with the sentiment of what is being expressed.
IN SUMMARY
Past performance is not a guide to future performance and some investments need to be held for the long term.
