Don’t predict. Prepare.
Short on guts, long on fear. This seems to be the mood of the markets. Delving deeper into the investor mood tells us that the major worries are elections and poor macro fundamentals. When the mood is despondent, the market response can only reflect the mood. This explains the capitulation in prices of stocks of companies whose books have high borrowings and heightened business uncertainty. Fear and uncertainty combine dangerously and almost always lead to a mindless sell-off. The past few weeks have been a sell-off season of sorts. The leveraged stocks have hit prices as low as 10% of their all-time highs of 2008. Obviously, prices don’t always go to zero. The damage remaining to happen will probably happen very quickly. The markets will slowly move on. One only needs to sense the mood a little ahead of it.
Few things go to zero.- Howard Marks.
Investors mostly believe that wealth is created through better performance of financial instruments. Therefore, when instruments fail to deliver, investors take the easy way of blaming the instrument. Faulting the manager is another common response. Investors mostly overlook the behavioral aspects. Wealth creation has become an increasingly behavioral phenomenon in recent years. Behavior plays a greater role in deciding wealth outcomes and assets are acting as vehicles driven by investor behavior. Investor behavior in recent years has been greatly prejudiced by volatility. Investors mostly head towards assets where volatility is positively distorting prices. If the prices go down, they simply press the exit button. Clearly, there is a serious need for investors to behaviorally alter their response to volatility. Volatility cuts both ways. Investor behavior must realign to sidestep volatility rather than to swing with its ways. The bet has to clearly move beyond volatility.
Time to stop predicting markets. Start preparing your investments.