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How Should I Invest When Everyone is Scared of the Market?

We live in a time where facts are a commodity and information is more accessible than ever. But despite having access to all the same information, it doesn't seem to help us view the world in the same way – everyone interprets it differently. And none of us are immune to it, no matter how much we like to pretend otherwise.

If there is one benefit to today's polarized political climate, it's the myriad examples of how, given the same set of facts, people can come to completely opposite conclusions about what those facts mean. Silver lining aside, though, it is worrying that there are fewer and fewer facts that we can all agree on as a society. This isn't just a political problem, either – it also puts investors in a bind.

But this problem isn't anything new to the human race. Many years ago, J.K. Galbraith famously wrote, “Faced with a choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy with the proof.”

The question is, why do we do this?

We Have a Strong Desire To Belong

One reason for this behavior is our innate desire to belong. In his book Atomic Habits, James Clear writes:

Humans are herd animals. We want to fit in, to bond with others, and to earn the respect and approval of our peers. Such inclinations are essential to our survival. For most of our evolutionary history, our ancestors lived in tribes. Becoming separated from the tribe—or worse, being cast out—was a death sentence.

The Harvard psychologist Steven Pinker agrees: “People are embraced or condemned according to their beliefs, so one function of the mind may be to hold beliefs that bring the belief-holder the greatest number of allies, protectors, or disciples, rather than beliefs that are most likely to be true.”

Viewing the problem through this lens helps us see that we don't always believe things because they are true; instead, we believe things because we want them to be true. Why do we want them to be true? Most often because we want to look good to people we care about. When we have to choose between something that is factually true vs. socially acceptable, we often choose family, friends, and colleagues over facts.

Investing As a Herd Animal

This type of herd behavior is precisely what makes investing so difficult. We all like to think of ourselves as clear-eyed and objective, not susceptible to being misled by our herd. But to illustrate how easy it is to fall into that pattern, we need look no further than the Financial Crisis of 2008-2009. During this frightening time, most people were panicked and certain that the financial system was collapsing (and with good reason), so the herd instinct was to RUN.

It was an emotionally frightening time, but more rationally speaking, it was also a great opportunity to buy stock in great companies that might otherwise have been unaffordable. For example, in February 2009, Boeing stock was at a dismal $31.44/share, and while most investors shied away (or sold the Boeing stock they had), smart investors saw an opportunity and took advantage of it. As of February 2019, Boeing stock was up to $439.96/share – an increase of almost 1,400%. If Nordstrom cut their prices by 93%, there would be a stampede to get in the door, but for some reason, stock market declines are the only sales people run away from. 

Being a buyer during that period meant running in the opposite direction of the herd and having to listen to each member of the herd call you an idiot as they ran past. It can be tough to stay the course when everyone is going in the other direction – even if you know you're on the right path.

There will be many times in your investing career when your resolve will be tested, and the herd will panic and pull you in the wrong direction. You'll find yourself doubting your investment approach and even your understanding of investing itself. But in those moments, remember: just because everyone else is doing it doesn't mean it's smart.


Don't Be Your Own Worst Enemy

Being human, we are our own worst enemy. World events and the market conspire to make people buy when things are going well and prices are high, and sell when things are going badly and prices are low – the cardinal sins of investing. Fighting that instinct is the number one ingredient to investment success. 

That's why at Quarry Hill, we adopt a rules-based investment approach that is unmoved by what the loudest members of the herd have to say about the future. We can't be objective about our own money (myself included), and the most prudent way to guard against your own biases is to place an objective third-party between you and your money.
 
Sticking with a herd has helped us humans survive until now, but we still have to be careful not to get trampled.

The inspiration for this post came from James Clear's blog. You can learn more about James Clear's book by clicking here.