Better Investor Brain & Black Friday

Better Investor Brain & Black Friday

Black Friday

A new year is soon upon us. Before long the holidays will be packed up and put away. The calendar will cross over to 2016, when we are barely into the habit of dating our checks with 2015. As we approach the holidays I want to share a few things I thought about as it relates to markets, investor returns and a less stressful retirement. Kind of like a pre-holiday gift of thoughts. I may even add in my personal Christmas list. After all it is the time for giving, right?!

Black Friday Blog 2Everybody knows what Black Friday is all about. Black Friday is the day after Thanksgiving. Most retailers get into the black by making their biggest profits for the year between that dark day post turkey and gravy, then closing out the end of the year with radical sales. For consumers it can be some of the lowest prices of the year. We wait for those advertisements telling us where and what to save on. We are all familiar with the news stories of people lining up at the doors of department stores in the early morning hours. We see video footage of crowds busting through the doors. Maybe you participate in the frenzied crowds of people that go early, stand in line and wait to sometimes fight over those great bargains.

It makes perfect sense to save money when items are on sale. Especially since many are still in recovery from the downturn of finances in past years. Where do we see these types of frenzied crowds in investing? Do you remember the news about people waiting in line to win the drawing to purchase a home in a new neighborhood in 2005 and 2006? These neighborhoods were empty when prices fell to the lowest levels in years. Sometimes we don’t see the crowd but we can see them in the volume of buying and selling, investments or withdrawals, news media hype etc. Remember the news reports of all the day traders who left their jobs in 1999 to trade full time? These stories are from many years past, and are still very relevant today when it comes to investing your dollars.

Black Friday Blog 1It must be human nature if the majority of people are doing the same thing at the same time. Does that human nature, which helps us save money on purchases, help us to buy and sell at inopportune times? That is exactly what the studies show. We see the massive volume of investors selling close to market bottoms and buying close to market highs. To actually buy low and sell high we have to do something different, maybe go against the crowd, our human nature and our internal wiring. Are you asking the right questions around your investing cycles? Are you like that crowd at the front door waiting to bust through the doors to save 50% off socks you do not need. Eh’hem. Did you get that? Socks rhymes with stocks.
I think some of it is because our brains tend to look for patterns and complete a picture, chart etc. It’s like looking up a hill, seeing all these housing developments climbing the hill. At its peak, your brain will automatically go down the other side of the hill and fill it with more housing developments, even if there is no development down the other side. Our brains are like that; always finishing the picture or the puzzle. When something is declining in price we sometimes think the current direction will keep on going, which is why we sell. When prices are increasing and others may have made a good return we project the increase into the future and don’t want to miss out.
As an example, when there is a dramatic fall in the price of oil, many stocks, bonds, and investments in related areas, will get pummeled. The pundits start to tell the story of how, for various reasons, lower oil prices are here to stay and may go lower. It is easy for our minds/feelings, our human nature, to complete the picture. Many react that it’s time to get out of the sector. But how do professional investors view market movements like this?
One example is Howard Marks, billionaire money manager at Oaktree Capital who explains bull and bear markets this way:
Stages of a Bull Market
First, when a few forward-looking people begin to believe things will get better,
Second, when most investors realize improvement is actually underway, and
Third, when everyone’s sure things will get better forever.
3 Stages of a Bear Market
First, when just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy,
Second, when most investors recognize things are deteriorating, and
Third, when everyone’s convinced things can only get worse.
To summarize another of his thoughts, professional investors live for the third stage of a bear market. Do you? Oil related investments may be there now or sometime soon. When everyone is convinced things can only get worse.
Do you see any opportunity in those stages? There may be opportunity in every stage if we can manage our feelings and do something a little different than everyone else. Imagine, if instead of showing up at 4am on Black Friday to get the best deals, you took that same energy and thought into your investments.
In his recent memo to clients, The Lessons of Oil, he sums up this dilemma very well:

“It feels much better to buy assets while they’re rising. But it’s usually smarter to buy after they’ve fallen for a while.”

And since I started off talking about Black Friday, can you help me out? Here is my Christmas List I have passed around to my family.  If you know of any good deals please share with me. While many are out hitting the sales on Black Friday I may be recovering from a turkey coma. Here is his Christmas List: Guitar Amp (Mesa Boogie, Matchless, etc.), Samsung Note 5, PRS Electric Guitar, 2 12 pound medicine balls, Amazon gift cards.
In the next “Better Investor Brain” note we’ll discuss why doing “what feels better” may be the cause of many of our financial problems.

About David W. Shepherd, Jr., CFP®

David is the Chief Investment Officer for Shepherd Wealth & Retirement and a CERTIFIED FINANCIAL PLANNER™ practitioner. Have a financial question? Click Here to contact David W. Shepherd, Jr.

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Investment advice offered through Shepherd Wealth Group, a Registered Investment Adviser doing business as Shepherd Wealth & Retirement.

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