The pendulum of market sentiment swings back and forth between the "be afraid" mindset and the belief that "the coast is clear."
In human psychology, we know there’s such a thing as confirmation bias. People want to hear only what they want to hear; they believe in information that is consistent with their previous beliefs. People with such mindset tend to assume their decision-making processes are better and probably more rational than anyone else. They would rather forget facts that may undermine their investment position. Investors with this kind of attitude, believe that risk assessments as well as due diligence no longer matter, conveniently forgetting that investing has always been a companion of risks.
Fear and greed remain pervasive in the global financial markets. So-called financial geniuses remain active in devising new ways to induce and seduce investors to part with their investible funds, always promising high returns to people who never suspected that these crooks were up to something wrong. It seems that huge monetary incentives warp the judgement of a number of good men so that even when things start looking bad, they’ll still take on more investment risks without some cautious guidance.
Many individual and corporate investors’ best intentions are sometimes clouded by instant gratification, and their usual focus is always on short-term, high-yield returns; they become less defensive and easily get caught in a difficult investment predicament.
These caveats are true in investing. Most investors must cut through the confusing marketplace jargon and misleading claims about performance. Dangers exist for investors for two major reasons. First, most people are vulnerable because they prefer simplistic explanations, and second, numbers appear more conclusive than softer inputs.
Would it be too much to ask your fund manager this fundamental question: What else could go wrong? Would it be a bother to ask him the specific risks taken, how profits were made, or losses incurred in your investment portfolio? If they can’t give you relevant replies to these questions, that’s a real red flag. In the transition of the investing public from disbelief to belief, from pessimism to optimism, they become willing to take a chance on making money, a distinct shift from simply trying not to lose money.
The strong crowd sentiments in the financial markets have been those of greed and fear: the fear of losing everything and the greed to double or triple it. The wave of greed begins in rising markets and forms the top of a bull market.
The same phenomenon occurs with fear. As prices begin to drop, the unconscious urge to follow the crowd leads investors to sell at the market bottom. Good news, bad news, friends, and strangers all conspire to create a rollercoaster frenzy in the financial markets. The prudent course for investors is to adhere to a single criterion often mentioned in investment books, but applicable only when the price is below the book value. It is crucial to grasp the implications of this reality. Numerous investment opportunities throughout the years have enriched cautious and astute investors. Predicting the timing of such shifts in the business cycle can be highly advantageous, as most significant and sustained fluctuations in the capital market are closely linked to corresponding changes in the business cycle. Success in accumulating wealth often involves following a specific approach. To adopt this approach successfully, individuals must cultivate a mindset that aligns with the strategies proven to lead to financial success.
We need a spark. The local capital market volume isn’t that great yet, and it continues to struggle.
Atty. Abelardo “Billy” Cortez is formerly FINEX national president. He’s board director of IAFEI (International Association of Financial Executives Institutes) as well as independent board director at First Metro Investment Bank’s companies/subsidiaries (Metrobank Group). He’s an awardee of the Most Distinguished Bedan Alumnus in the field of banking and finance from San Beda College.
The views and opinions expressed above are those of the author and do not necessarily represent the views of FINEX.