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

We all have a problem. I'd love to think of myself as immune to this problem, but unfortunately, I'm not.

We live in a time where facts are a commodity. Information is more accessible than ever. However, though we all have access to the same information, it doesn't seem to help us view the world in the same way. 

If there is one benefit to today's polarized political climate, it would be that it provides case study after case study of how people of goodwill can come to opposite conclusions given the same set of facts. It's not only a problem for our political system here in the US, but it's also a problem for us as investors.

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.”

We Have a Strong Desire To Belong

What is it about humanity that causes us to do this? 

One reason for this behavior is that we all have a deep 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 put it this way, “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.”

Understanding the problem with this lens helps us to see that we don't always believe things because they are true. Rather sometimes we believe things 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 would like to think that we can be objective and not succumb being misled by our herd. However, to illustrate the challenge of going against the herd we need to look no further than the Financial Crisis of 2008-2009. During this frightening time, most people were panicked and believed the financial systems was collapsing. And with good reason! The herd movement was to RUN.

It was an emotionally frightening time, but more rationally speaking, many wonderful companies were now selling for half price. If Nordstrom cut their prices in half, there would be a stampede to get in the door. Stock market declines, however, are the only sales people run away from. 

To be a buyer during that period was to run in the opposite direction of the herd all while having to hear the herd's reasons for why you are an idiot. It's tough to think clearly if the correct course of action runs contrary to what everyone else is doing. 

There will be many times in your investing lifetime where your resolve will be tested. The herd will panic and pull you in an unhelpful direction. What you know today to be the best investment approach will be challenged. 

Don't Be Your Own Worst Enemy

Being human, we are our own worst enemy. Everything that goes on in the world and the market conspires 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. 

For that reason, at Quarry Hill, we adopt a rules-based investment approach that is agnostic to what the loudest members of the herd forecast 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.
Though sticking with a herd has helped us humans survive until now, 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.