By Carl Capolingua
Head of Education
Most people know of the two great animals we usually associate with the stock market. Perhaps the best known are the bulls. These represent investors which are driven by greed and optimism. The bulls can be found rampaging down Wall St when better times are perceived ahead, flooding the market with cash to buy shares and pushing prices higher. Bull markets are markets which rise pervasively over time – we all love bull markets – everyone makes money!
The bulls’ sworn enemy are the bears. Imagine now a bear emerging from hibernation after a long cold winter. Cranky and hungry is not a good combination. Imagine now poking this bear with a sharp stick and what he would do to you. Well that’s pretty much what the bears do to share prices in a bear market! These markets are caused by investors who have little faith in the ability of prices to rise and therefore wish to sell. Driven more by fear and pessimism the bears smash prices lower.
There is another far less well known animal which I have recently found describes most investors at the moment. At each free seminar I’ve done lately I’ve been asking attendees to participate in a survey where they declare themselves to be bulls or bears. Increasingly, as the market has unravelled, I am finding far fewer bulls, far more bears, but even more of another group – those who do not fit into either camp. When pushed on the matter they declare themselves as fence sitters – they have no idea where the market is going and therefore intend to ‘bury their head in the sand and hope for the best’.
Ergo my third group of animals in the markets – the ostriches!
My trading mentor often described the inability of investors to act decisively in crumbling markets as the ‘ostrich technique’. This involves deferring acting one way or the other in the hope that things will get better, or simply ignoring the situation altogether. The theory here is perhaps ‘What you don’t know can’t hurt you’.
Many adopt the ostrich technique out of ‘analysis paralysis’. Based upon the deluge of information in front of investors they become confused and lose the initiative to act. Soon, they wouldn’t know what to do even if they wanted to. This is rarely the best solution as markets can and often do fall much further than most expect. Getting out half way down is still better than holding all the way to the bottom. Most just assume however, rather incorrectly, that it’s too late to act and they might as well hold on.
It’s never too late to act. Good investors are decisive. More importantly, good investors are decisive at following a plan. Ostriches on the other hand are indecisive and do not have a plan…
As my mentor would often say “There are great benefits in adopting the ostrich technique. At least with your head in the sand you can’t see what’s going on. This might be comforting for some but there’s also a major drawback as well…with your head in the sand it means that other more delicate parts of your anatomy are rather exposed…and that’s not good for anyone!”
My advice to investors? Be a bull – commit your funds in the market and take a position. Be a bear – recoup your funds and live to fight another day. But whatever you do, please, please don’t be an ostrich!
Until next week…