Saturday, August 16, 2008
We all have our beliefs or bias as to what we think is or should happen. For the most part our beliefs are influenced by recent history. As humans we are programed by our emotions to look at the past and expect the future to look the same. Unfortunately the world doesn't actually work that way. The world is constantly changing. Always will be. Sure there will be periods of time where trends will develop. They may last for long periods of time. What I can guarantee you is that change is inevitable. Nothing lasts forever. Markets don't go straight up or straight down.
The simple fact is that change is going to happen and it's probably the single most dangerous concept that investors tend to ignore. (Well beside position sizing) Once we get locked into a belief and especially once we put money behind that belief it becomes very tough for us to break that bias. We start to rationalize why we are right even if change is blatantly obvious.
Take a look at the three charts and you tell me if something has changed.
If there is anything that has amazed me over the last year that I've been writing this blog it's how strong investor biases can be. During the first part of 07 I was bullish. The only readers of the blog were bullish investors and of course the occasional bear telling me all the reasons why I was wrong. Of course the one reason that was telling me that I was right was that I was making money. The bears could not fall back on that rational. Once I recognized the start of the bear market readers and subscribers spiked. Obviously there were a lot of investors out there who were bearish.
Like any normal human we like to see confirmation that our view is correct. If someone else has your same view then it reinforces your belief that you are on the right side of the market. All of a sudden I was reinforcing the bearish belief. Viola, a whole new set of readers.
Now when you think about it this is ridiculous behaviour. Since no one can actually see the future none of us really has any idea of what's in store for tomorrow. Searching for someone to validate your position is really quite stupid. That being said we still all do it. I'm just as guilty as the next person.
Now I've turned bearish on commodities I expect that I will lose a segment of my readers and subscribers as I'm no longer reinforcing the bullish case. I've already seen quite a few oil bulls drop off the subscriber list. It was obvious that these investors were interested in getting confirmation of their bias. Once I didn't give it to them anymore they decided to look elsewhere. It didn't matter that I was correct and could have saved them losses by getting them out of oil when it became apparent that something was changing. They were unable to break their bias.
I suspect I will now lose readers who continue to hold on to the bullish case for gold. Again it doesn't matter that I've been warning for several weeks that the bells and whistles were going off in the precious metals sector. It doesn't matter that I was right and if one had been able to set aside their bias for a minute and look at what was unfolding they could have saved themselves losses. None of that matters really. What we want is confirmation that we are right and that it's OK to continue to lose money because the market is going to turn and go our way soon.
I strongly suggest that we try to think outside the box and not let our beliefs control our actions especially if the market is telling you something different. Remember you can argue with the market all you want but you will never win that argument.