Does anyone doubt that psychology plays a major role in the movement of the stock market? We see a bleak future and we sell our stocks. We see a perpetual down market and we resist buying stocks. We are sure that home prices can only go down, so we don’t buy that new home we want.
Pessimism feeds on itself. We ignore the history of the market because we only see what is in front of our face. We rush to buy things we want at the store when they are deeply discounted, but we ignore stocks. Why jump on a sinking ship?
This is why the markets don’t always make sense. We listen to emotions, we listen to senior politicians, we read articles in national magazines and we don’t see light at the end of the tunnel.
We have been here before. As a matter of fact, we have seen worse. We hear that this is a different kind of recession and maybe it is. We hear that the recession is worldwide, and it is. Unemployment creeps up and we hold onto our money with a death grip.
Out there in the darkness somewhere are a few contrarians licking their lips.
There were companies that were market leaders five years ago and they still are. There were companies with innovative products five years ago and they still exist today; and their products are still innovative.
Our culture moves towards new technologies and there are companies that manufacture and sell these products. They do today and they will tomorrow. While the stock of these companies is on sale, should a frightened investor ignore it?
Some people are taking advantage of these scary times and they don’t even realize it. Their 401k contributions continue to flow. What they may not understand is that they are buying mutual fund shares at a discount.
When you buy at a discount and your employer contributes to your savings, and those funds are bought at a discount, the net effect is good. Maybe this frightening psychology is misplaced.
Yes, we have a government in overdrive. They are spending money at such a rate that our grandchildren will be on the hook for the debt. For now, we might do well to concentrate on what opportunities exist right under our nose.
Should we listen to the doom and gloom and clutch our pocketbooks like tomorrow will never come? Maybe, but there will still be companies making good products and selling those products tomorrow and the day after.
Psychology can work as a science with good results. But psychological influence on people’s common sense can be a bad thing. It’s a good thing that those 401k contributions are almost invisible. That bad psychology cannot disturb those contributions.
And what about those contrarian investors?
Their psychology is wired differently. There is no gloom and doom for them. Today is a happy day. Tomorrow is a day filled with opportunity.
In five years, they will be laughing while they pat themselves on the back.
Remember 2009, they will say. That was a good year.
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