October 29th, 2008

Nothing about the stock market is too predictable…what you expect usually does not happen.

Some will disagree. For them, the direction of the market is clear. At least clear when claiming prescience. They’ll never admit when wrong; they will boldy exclaim and humiliate when right.

Stock trading intra-day has relevance, but what seems to matter most is what the market indexes say at 4PM (or after the final trades settle around 4:10 or later).

Here are three observations:
• Volatility prevails
• The better hedge funds seem to be standing on the sideline
• Nobody is really certain about what happens next; Those who are certain see “gloom and doom”
• Many wait for the next economic “shoe-to-drop”

Finally, whatever happened to dollar-cost-averaging?

You’ve heard or read the story about Chicken Little (I have five of them roosting outside my office window; in moments of distraction, I watch them eat while my dog snores on the office couch.)

Anyway, Chicken Little hunts and pecks for morsels, gets whacked by a flying acorn, and thinks (chickens don’t, but you get the point) the sky is falling. Off she runs to Federal Reserve Chairman of the Kingdom. News gets out, and the eggs start falling off the wall, the sky starts cracking, and everyone runs for cover with egg-on-the-face.

Every story has a moral. Chicken Little teaches us to have courage, fortitude, and conviction. One version tells us that everyone runs for cover because the sky is falling. That story line tells us not to follow the herd or in this case, the flock.

How come we feel so much worse when markets decline, crash, collapse, or crumple? What makes us so vulnerable when thinking events have turned against us? Behavioral science gives us an answer.

Investors feel worse over a loss than they feel good over a gain. Feeling loss of any type reminds us of death, deprivation, disappointment, and depletion. Loss reminds us of mortality. You may find this a thougtless-stretch; I find it a thoughtful-truth. Fear shouts louder than confidence because facts lack relevance when facing danger.

No matter how many facts line up to reassure us, most of us just can’t be convinced. That ugly feeling in our gut will not go away. The facts matter (as time may confirm), but sometimes feelings overwhelm and many investors become Chicken Little. However our confidence, resilience, determination, and commitment toward work and innovation may just prevent the sky from falling.

“If you can keep your wits about you while all others are losing theirs, and blaming you. . . . The world will be yours and everything in it, what’s more, you’ll be a man, my son.” - Rudyard Kipling, English short-story writer, poet, and novelist. Nobel Prize(1907), 1865-1936