The calls to act are a constant lure with the stock market. That chorus grows whenever the markets move in the wrong direction. You see this plainly in two brazen headlines of late: Markets in Turmoil and Sell Everything.
You may recall the story of Odysseus from high school Lit class. The Siren’s were beautiful creatures with sweet enchanting voices tempting promises which no one could resist. Upon hearing the songs, unwitting sailors would change course, turning their boats to their doom.
Only, Odysseus knew this and had a plan. He ordered his shipmates to plug their ears while they tied him to the mast. Odysseus did nothing, being tied up and all. And the crew never heard a peep. Thus, Odysseus and his crew were the only people to survive the danger without a scratch.
So what does this have to do with you and the stock market? Well, there are a few things you can learn from this brief adventure:
- Actions that sound great right now can lead to terrible results later on.
- Following a plan, even when everything screams otherwise, is a great way to avoid danger.
- Not listening is a great way to survive.
- The best time to act, if ever, is well before you hear the siren’s song.
The current siren’s song tempts you to avoid more short term pain. And many investors will listen and change course.
Or you can embrace the pain, stay the course, and recognize what’s going on.
The market is an emotional beast and the daily price swings are a reflection of changing investor sentiment, as Graham pointed out. Howard Marks expands on Graham’s idea in his latest memo:
Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead.
Today, investor sentiment has shifted from confidence to doubt. It’s saying – what looked great yesterday, looks less great today.
The headlines and the voices on the idiot box are simply projecting that shift into the future. Their song is a sweet tempting idea after the market moved down. Except the headlines only hope that anyone will listen. The call to act, like a call for a crash, is a cry for attention.
Market declines are typically short-lived and always temporary (so far). Eventually, sentiment will shift back. Heeding the sirens, changing course, means you’ll miss the shift when it happens.