Investor
Psychology
At Market Bottoms
by Richard Geist, editor
Strategic Investing
Investors
are traumatized. Not only are we in a recession, many portfolios
have been cut in half, hundreds of thousands have lost jobs,
and we are living in the aftermath of a traumatic attack on innocent
citizens that turned us into a country where security can no
longer be taken for granted. These real occurrences in the world
have left most investors feeling vulnerable in several ways:
First, our sense of
well-being, in which we feel whole, alive, vital and together,
has become more shaky.
Second, our self-esteem
is no longer as resistant to the bumps and bruises of everyday
life.
Third, our sense of
feeling like the same persons we were previous to September 11th
has changed. In other words, our identity in time and space remains
less stable.
Fourth, our sense of
feeling relatively independent and efficacious our sense being
able to have an impact has lessened.
Fifth, our sense of
optimism and hope has given way to a more pessimistic and despairing
outlook.
Sixth, our sense of
inner cohesion has given way to an inner disorganization in which
there appears to be senselessness to the world.
Seventh, our sense
of activity feels more frozen, and there is a kind of mental
paralysis pervading our activities.
In the context of these
vulnerabilities, many are feeling a heightened sense of vigilance
and alertness. A good analogy to the current situation may be
our relationship to oxygen. We generally take this gaseous element
for granted, paying little attention to our breathing. It is
only when we experience a dearth of oxygen that we notice how
dependent on it we really are. As a result, we become pre-occupied
with and focused on every breath, which prevents us from going
about our daily lives unencumbered. This hyper-vigilance occurs
not only in everyday life going to the city, entering tall buildings
or crowded venue, traveling; it also occurs in the stock market
watching our portfolio too closely, worrying about every down
tick in a stock, being quick to sell core holdings.
Hyper-vigilance, combined
with our vulnerable state creates very short-term investing orientations.
And in a reflexive way, this short-term orientation feeds on
itself to create a more pessimistic market outlook.
That's What Market Bottoms Like
Despite
the devastating weightiness of the World Trade Center disaster,
which heightens our emotions, all of the above characteristics
are common at market bottoms. Because all of us are motivated
to make rational sense of our emotional reactions, we tend to
attribute them to specific external events. For example, psychologists
talk about the WTC explosion evoking post traumatic stress syndrome,
but the fact remains that at nearly every market bottom we observe
similar emotions with or without a traumatic external event.
However, at nearly every market bottom, we do experience an external
traumatic event, which serves as a beacon that attracts explanations
for our psychological state.
A
recession usually accompanies any bear market, and if you've
followed our columns for the last six months, you know, despite
government figures to the contrary, we've been in a recession
for many months. The terrorist attack merely allowed us to provide
a rational reason for acknowledging this harsh economic reality.
The moment when we
feel most vulnerable to political and economic events signifies
the nadir of the bear market. But, because investors have been
traumatically silenced by their psychological vulnerabilities,
and because cognitive and emotional distortions are common at
market bottoms, there is little motivation to think long-term
about our portfolios. Survival in the present takes precedence
over everything. Yet it is exactly at this moment that the market
is offering us some of the best buying opportunities of a lifetime.
Taking Advantage Of Market Bottoms
In
order to take advantage of these opportunities, there must be
a profound shift in investor psychology on three levels. First,
our lowered self-esteem must resume its normal equilibrium. This
requires overcoming the deeply held conviction of shame accompanying
the belief that we are responsible for our investing failures.
The reality is that we are indeed responsible for our investing
failures; but without the sense of shame, we are able to review
our mistakes, understand them, and regain enough confidence to
know we will not repeat them. When the sense of shame persists,
however, it evokes our need to hide our mistakes (from others
and ourselves) and focus on a sense of badness that accompanies
our humiliation. No one in the stock market escapes losses (those
who tell you they have never lost money are lying). Bringing
yourself to the point where these losses can be discussed automatically
decouples the shame from the mistakes and allows a resumption
of investment strategies.
Second, we must regain
our sense of efficacy. In other words, we must have the confidence
that we are the "author of our actions." When feeling
vulnerable, we assume that we are at the mercy of the market,
that we have no control over our fate. To act in a contrarian
way when the market reaches its bottom requires that we resume
our belief that we can if fact affects our financial future by
investing in the market. The best way to accomplish this psychological
retooling is to sit down and formulate a strategy going forward
with whatever monies remain for investment purposes. If this
feels impossible, then a financial advisor's help is essential.
Third, re-engaging
the market at its low requires overcoming a sense of detachment
and numbness. Our vulnerabilities predispose us to a certain
detachment from the market. This "I don't care anymore"
attitude prevents the excitement and enthusiasm necessary to
play the stock market game. You must, at this point, search for
and find something in the market that excites (and motivates)
you. For any investing plan is not absorbed from without; it
is discovered from within.
Editor's Note: Richard
Geist is editor of Richard Geist's Strategic Investing,
1905 Beacon St., Waban, MA 02468, 1 year, 12 issues, $157. In
his widely acclaimed newsletter, Richard Geist culls through
thousands of small-cap and micro-cap investment opportunities
to select only a few, each possessing those unique investment
qualities likely to propel a reasonable investment into a lifetime
fortune. Pharmaceuticals, high-tech, and communications are just
some of the industries represented in his fully researched recommendations.
