Monday, June 24, 2013

Which Animal Spirit Are You?

Okay, maybe just one more post before taking the summer off …

The stock market climbed above 1685 (S&P 500) in May but finished today under 1575. What’s an investor to do?  To help figure it out, let’s look at two active market participants: Billy Bear and Bobby Bull.

Billy Bear

Billy was very nervous about the stock market because of the weak economy and the unstable world financial markets.  Billy sold his stocks weeks ago when the market was just less than 1600.  However, Billy suffered physiological distress and “sellers” remorse as the market climbed higher and higher.  This made Billy a sad, sad, bear.  “I should’ve held on to my stocks and sold when the market was much higher”, Billy lamented.

Billy’s nemesis, Bobby Bull, found great delight in Billy’s plight and ridiculed him unmercifully.  “You shouldn’t have sold, you stupid bear!” he said.  “Look at all my new found profits and I’m even going to have more wealth when the market goes even higher!  You won’t get any of these great profits because you are an idiot!” he boasted.

But the market now has dropped below where Billy sold off.  While this alleviates Billy’s psychological stress and has caused Bobby to shut his pie hole, it doesn’t help Billy figure out what to do.  Although Billy has seen that the market can go higher, he will not buy because he is afraid the market may still crash.  So:

Cause little Billy, Billy Bear won’t - go buy
But you can’t force Billy to
Billy won’t go
Try saying it’s a bargain, but oh no
Cause little Billy, Billy Bear won’t - go buy

Bobby Bull

Bobby laughed at all the “wimps” who got out of this smoking hot market in May.  He was riding this rocket to the moon.  He is very disappointed in this very minor, very temporary setback.  Hell no, he ain’t selling.  “Are you crazy?” he asks.

He is not going to sell now because it would be very psychologically distressful knowing that he could have sold when the market was above 1685 but didn’t.  He tells himself if the market gets back above that level he can always sell.  But the sad truth is if the market goes back up, Bobby still won’t sell.  This is because the momentum that would drive the market up to that point would cause Bobby Bull to think the market was going much higher.  So:

Cause little Bobby, Bobby, won’t - go sell
No can’t push Bobby out
Bobby won’t go
Try warning him of danger, but oh no
Cause little Bobby, Bobby, won’t - go sell

And all the other animals in this menagerie stand watching the action, confused, wondering what to do ……..

No comments:

Post a Comment