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Psychology of the investor

October 28, 2008


Mark on the markets Mark Patterson


Psychology of the investor

Much of the volatility with the stock markets today is associated with the psychology of the markets, investors and traders. As an example, my point is that when the markets are doing really well and going along just fine, there is a lot of complacency among the investing public. Instead of paying attention and maybe taking profits in some stocks or funds that have profit, the complacent investor will allow those profits to slip away and proclaim that they are a long term investor and make themselves feel better for their lack of action.
You can hear that statement from individual investors, mutual fund reps and mutual fund salespeople from the local diner to the national media. Many people, who are trapped in the markets by their mutual fund salespersons actions or their own, are repeating the mantra; I am a long term investor.
The mutual fund salespeople are using terminology like “stay the course”, “the markets on sale”” don’t look at you statements”. Understand that your mutual fund salesperson is in a tough spot. Instead of leaving a good portion of your portfolio in cash for market downturns, they have likely maximized their commission and invested all cash, which leaves no powder dry.
Because of the perception that if you invested money “for the long term” there can be no fault or guilt at the fact that maybe we or our broker had a faulty strategy. If you had invested money 10 years ago in a basic mutual fund or in the markets in general, you have not made any money. You may have even lost.
Looking forward to the next ten years doesn’t give me any comfort that the buy and hold strategy will work to grow your portfolio.
The equity markets are driven by factors that we cannot control, but we can take advantage of these, many of the sharp sell offs in the market are driven by institution selling triggered by redemptions in mutual and hedge funds. Many of the up rallies are short covering rallies and not the start of new bull markets. As I have said many times before, when we get the next good rally, sell some stocks or funds and gain liquidity for opportunity that is a day or two away in this environment. If you freeze up and let the markets beat you in to submission, they will.

Mark Patterson is a money manager with MHP Investment management, and can be reached at 447-1978 or Mark@MHP-Asset.com