Bearish or bullish? Which direction to go?
The ideas expressed article below, which I found online at http://www.btimes.co.za/98/0913/btmoney/money06.htm , are wise, IMHO! Even though it's talking about the stock market, it actually sums up the argument that we have about the real estate market here.
Fear and greed are an investor's greatest enemies
OVER the next few months we are bound to hear of many people who not only knew the market was going to crash, but who liquidated all of their shares - and are now sitting pretty. Some market commentators, investment newsletters and publications will also claim to have got it right. Very few will admit they were wrong.
Some interesting studies have been done in the US relating to the average return achieved by average investors over extended periods. Both the Morningstar and Dalbar Inc studies show that where the market achieved an average return of 12% a year, the average investor achieved a loss of 2% a year over the same period. In other words, you are not alone if you are making poor returns on your investments - most people are going backwards!
Why should this be the case?
Is it simply because the average investor experiences the two "investment emotions" almost all the time? Fear and greed lurk in the background of their decisions. Then along comes a well-meaning "Pied Piper" in the form of an investment newsletter, a newspaper reporter, or a radio journalist with a specific theory of what the market is about to do and the investor, "warped by lurking fear and greed", makes a radical decision.
From the information on capital flows it is clear that the average investor buys high and sells low. This can only be explained by greed (when everyone else seems to be making money) and fear (when there is "blood on the streets").
Often the market commentators have some form of system. It could be based on price:earnings ratios, historic price movements or a form of over- or under-value. They may be very persuasive, but the question is whether they really believe their own system.
I say this for one simple reason: if you had a system you were adamant would be able to predict stock market movements without any doubt, what would you do? Surely you would borrow to your maximum, invest every cent in the stock market and tell no one. After all, markets are made by people having different opinions. If you told everyone of your foolproof system, everyone would be following it and there would be no market. So you would certainly implement your system, make a fortune and sit back.
The crime situation in SA stimulates (admittedly in a different way) a similar emotion to what most people feel with regard to the stock market - fear! Imagine if you came up with a foolproof method of preventing crime, and there was no doubt about it -you and your family could avoid being subjected to crime in any way.
If you went out and shouted your system from the rooftops, surely criminals would find a way around it. So a better approach would be to act in a totally selfish manner and keep it to yourself. So it is with market commentators who say they have a system.
Even the most successful investors in the world, people like Warren Buffett, readily acknowledge that there is no fancy system. The top investment managers all over the world acknowledge it. They cannot (and in fact do not know anyone who can) time the markets.
So what do you do?
As in the case of crime in SA, all one can do is think about the options, develop a plan and implement it. Relating to crime, that may mean putting up a big wall, adding an electric fence and having 24-hour security.
If you then had a burglary, that would not mean your plan was wrong. All it would mean was that you needed to re-assess the problem and possibly make some minor adjustments.
The market is in the same position right now - all you can do is diversify your assets among asset classes, countries and currencies in accordance with your own lifestyle objectives.
Over the past 20 years the average investor could have made 12% a year by accepting market returns. Instead they tried to beat the market and ended up with an annual loss of 2%.
It is always difficult to stick to a plan when the going gets tough, but there is no alternative to the two most important principles in investment - diversity and long term.
(Reposted from http://www.btimes.co.za/98/0913/btmoney/money06.htm All credits go toward the author of the article.)