10/2015-
The last few weeks witnessed one of the greatest market panic and despair I have ever since, since the Global Financial Crisis (GFC) in 2008. Measured by its severity, the asset classes affected, its worldwide impact and the negativism it arouse among market participants, institutional or retail, the current level of negativism has probably hit a new record.
Noteworthy too is that few of the recent market corrections that we have seen in this current decade after the GFC are related to weakness in the companies’ assets or management fraud, but were the result of market conditions brought on by investor changing psychology, the interconnected finance market and the undue focus on weakness of China’s economy.
Once again, this sell off and the accompanying negativism is an exemplification that global markets react to all sorts of news and data. However, during a selloff, a lot of bad things seemed possible, but that does not mean that these bad things will happen. Yet, investors’ behavior is to focus their selling such that these bad things already seem inevitable –
Welcome to the world of Negativism, which knows no limits. In this instance, could the Black Swan be blacker than black?
As smart investors, I have always encouraged one to always be skeptical of things you read, avoid the popular media which tend to trumpet and thereby worsen the news of the day and do your own homework and analysis.
I have always considered that being a successful skeptic is one of the most important requirements for successful investing. Skepticism is to question what popular media question as the quality of China’s slowing GDP growth and its impact on stocks. Skepticism is needed to really drill in the impact of interest rates liftoff by the Federal Reserve (nevermind that it is most likely a 0.25% increase only after 7 years) and its careening causes on the different asset classes.
After which, the smart investor should decide if indeed, the current negativism scenario is actually overdone.
In doing sensitivity analysis, the smart investor should always think deeply into the different scenarios and more importantly, the probability of each of the negative scenarios happening. Yes, the thought of knowing the different negative scenario can be frightening, but this does not equate to each of the negative scenarios happening!
One of my favourite writers, the late Peter Bernstein defined risk as “Risk means more things can happen than will happen”.
While I do admit that one has to add a higher risk premium in calculating the range of probabilities in scenario analysis of stocks and bonds, I would also caution that risk can also be defined as “risk of missing out on a good opportunity”.
So has the markets touched new lows that the risk of missing out on buying at great valuations have been camouflaged by huge doses of negativism?
Maybe you should stop shuttering and rethink risk as missing the upside as opposed to losing money in down markets?
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