It’s one of the most basic human instincts, psychology 101 type-stuff: fight or flight. Whether it was on the playground as a kid, at a party as an adolescent or in the work place as an adult, you’ve likely faced a multitude of situations where instinctually, given things didn’t look so good, you’d rather remove yourself from the situation. Your “flight” instinct kicked in.
But one of the most basic instincts, an instinct that is the core of your being, might preclude you from participating in some of the best and most profitable investment opportunities of your life.
Let’s explore why.
Contrarianism
As investors — and people — looking to achieve our financial goals, partially through our investing strategy, we’re constantly bombarded with news and narratives woven throughout the media, financial or otherwise. Moreover, there’s a boatload of data added to the discussion of these narratives, some of it irrefutable (like historical price data on a stock). But what’s not so obvious is that constant bombardment on one of your core emotions… fear. By pushing our “fear” button, others around us are implicitly also exacting our flight instinct.
Why would we stick around a fearful situation? In investing, the answer would be potential profit.
What is Scary Right Now?
In the investing world, what narratives are currently eliciting maximum “fear” and “flight” from investors?
Here are a few:
- Emerging markets (especially their currencies)
These headline grabbing market narratives are currently in Mr. Market’s doghouse. No one likes them. They’re junk. They’re worthless. Only a fool would invest in them. Right?
In fact, oil’s so bad that Goldman recently made a $20 call on it.
Run away. Right?
Invert Your Flight Response: Don't Run
While I’m not suggesting these macro thematics are screaming buys, what I am imploring is that as astute price- and value-oriented investors (price is what you pay, value is what you get) we need to be self-aware enough of this initial, natural reaction of avoiding scary situations. And there’s no doubt the thought of losing hard earned investment dollars is scary.
We need to embrace these situations and use them as opportunistically as possible exactly because most investors are — partially based on their emotional reaction — running.
Inefficiencies in the market are spawned by over exuberance, both positive and negatively. Overblown selling can result in serious opportunity. When asset classes reach maximum pessimism, we should recognize this signals one of the best opportunities to own pieces of quality businesses which have become the proverbial baby thrown out in the bath water.
When we hear viscerally negative sentiment, our ears should perk up. We should investigate further, we should do deeper research, we should look into the fact that a broad-based, prevailing sentiment has provided us a potentially great opportunity to own good companies at reasonable prices.
The Bottom Line
Investing is an interesting art. There’s no magic formula to success, it’s some indiscernible amount quantitative analysis mixed with psychological control and understanding. What we need to embrace and recognize sometimes are our basic psychological reactions as related to the physical (yes, we should still run when our vastly physical superior is looking for a fight) do not equate as analog to the metaphysical world of finance and successful investing.
Have a great weekend and talk to you on Monday.
