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In Volatile Markets the Worst Decisions Are Based on Fear and Greed

In Volatile Markets the Worst Decisions Are Based on Fear and Greed

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Tuesday, 10 April 2018 04:25 PM Current | Bio | Archive

I have been managing money for almost 45 years. Over that time frame I have see some frightening stock market declines and some massive rallies. The most frightening was the meltdown on September of 2008. The fact that the congress decided initially not to bailout some of the financial service companies gave great concern that we were about to see a massive world wide depression because of the real estate and mortgage market collapse. That decline pales in comparison to October 19 of 1987, when the market lost 22.61 percent in one day.

The worst day in the great depression was October 28, 1929, when the markets declined 12.82 percent. I was not alive during the great depression but I had already been in the money management business 14 years when the market crashed in 1987. As I said I have seen a lot of declines and I have always had cash to buy on those bad days. I spoke to most of my clients on the evening of October 19, 1987, and reviewed what had just happened, that we have survived the worst market decline in history. They wanted to know what I was planning to do, my response was spend some of the cash and buy undervalued quality. We did and the outcome was that all the clients made a great deal of money.

I have proved time and time again that if you have cash and eliminate fear and greed from the investment decision you can make a great deal of money. I have followed this same philosophy in every market correction including the one we are in right now. The Dow Jones Industrials started the year at 24,719 and closed Friday April 6 at 23,932 or down about 3.1 percent. The all-time high for the Dow Jones was set on January 26 at 26,616 as was pointed out closed on April 6 at 23,932 or a decline of 10 percent.

A normal correction in a bull market is about 10 percent, sometimes higher and other times a little less. Look at the chart to see how steep and how quick the decline in the market has been in a short period of time. Does that look like the most scary roller coaster ride you have ever seen at a theme park?

Now let's look at the same activity in a 5-year chart.

Not nearly as scary as the shorter-term chart is it? The point I’m trying to help you understand is that markets go up and down over time and if you panic and sell more often than not you will wind up selling at the wrong time. I have talked to many people who regretted selling in the first quarter of 2009. They told me that if they had just left things alone not only would they have recovered all the decline but a whole lot more.

When I asked them what they did with their money, they responded, I put it in the bank at near zero return and they were reluctant to get back into the market. This is where the second half of the fear/greed factors. For almost 8 years money in the bank produces an almost zero return. If we look back at the inflation rate during the Obama term as president we see the cumulative CPI was 11.36 percent according the U.S. Department of Labor, Bureau of Labor Statistics. Those people who took their money out of the market gave up any dividends they were earning which was much more than the rate they were earning in the bank, and deposited in the banks lost spending value to inflation. As the market continues to rise those people who were not in the market see the returns rising and, not wanting to miss all of the rally, finally become investors again and buy near the high in the market.

Donald Trump becomes president and initially the markets sell off, but then the markets start on one of the biggest rallies in the history of the market without a significant correction until late January of this year. Now will the people who were the last to get in be the first to get out when fear takes over again?

The price of oil was $140 per barrel in June of 2008 and fell to $33 per barrel in 2009 and continued to flounder until it hit bottom February 2016 with the price of $26.05. As of Friday the 6 of April it was $62.06, a sizable gain. But all through the rise in the price of oil no body was suggesting to buy it. If I’m correct I think oil will hit $70 by mid-year and you will here people suggesting now is the time to buy.

I know it is hard to watch prices go down and trying to decide what you will do with the money when you sell. It is almost just as difficult to watch prices rise and agonize over should you sell. In selling a stock the greed factor is how much will I leave on the table if I sell? Then what to do with the proceeds that need to be reinvested but were? The struggle between fear and greed is never ending, but if you understand that it is emotion and not reason that is driving the decision then it's time to walk away and try again another day. One quick example, General Electric (GE). This is not a suggestion to buy or sell but I use it as an example of reason over emotion. GE on Friday closed around $13 a share. Question number one: “Is GE going out of business?” The dividend is yielding 3.83 percent at this price. If your time horizon is 3 to 5 years do you think GE will be higher or lower than it is today? Those are non-emotional questions and depending how you answer the question you can make a decision to buy it or not.

Take the emotion out and make rational decisions. Not all investment decisions will produce positive results but at least you will know the reason you bought was based on good judgment. One last recommendation, proof you investment every year. Ask the question, will this company continue to prosper or will it fail? If you don’t think it will succeed sell it and move on.

Dan Perkins is an author of both thrillers and children’s books. He appears on over 1,100 radio stations. Mr. Perkins appears regularly on international TV talk shows, he is current events commentator for seven blogs, and a philanthropist with his foundation for American veterans, Songs and Stories for Soldiers, Inc. More information about him, his writings, and other works are available on his website, DanPerkins.guru. To read more of his reports — Click Here Now.

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DanPerkins
I have been managing money for almost 45 years. Over that time frame I have see some frightening stock market declines and some massive rallies.
stock market, investing, fear, greed
1142
2018-25-10
Tuesday, 10 April 2018 04:25 PM
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