Beyond The Headlines
Against Our Nature
I walked into a snake pit. It was among the more memorable moments of the last two years. On one of our early pandemic hikes in the Appalachian Mountains, my wife Megan and I found six rattlesnakes basking in the sun. They blended in so well, and we were blinded by the sun. Despite that, it only took my brain an instant to register a snake-looking shape, and my body froze, my heart started pounding, and my breathing sped up. It was a true fight or flight, a life or death moment. A million years of evolutionary conditioning jolted me away from imminent danger into safety. It’s part of our nature. Yet, in investing, we have to go against our nature and deeply ingrained instincts, time after time. Why is that? Let me explain.
Investing is a fascinating yet peculiar pursuit. When our gut tells us to hide, the best buying opportunities likely abound. When the fear of missing out overtakes us, and we feel that we should chase a hot stock at any price, it might be the time to wait and pass. As the stock market resumed a rollercoaster ride in the last few months, it’s a good moment to revisit our instincts and see where they serve us and when they can get us in trouble.
For those investors who gave in to their instincts, it’s been a very trying time. Those who panicked and sold all in March 2020 missed out on one of the fastest market recoveries. Others who surrendered to the fear of missing out and bought the hottest stocks in November 2021 saw dramatic losses in the next six months.
Whenever I’m in a forest, I often think about how I am here today because of my countless ancestors that jumped and ran when they saw a threatening shape in the bushes. It’s a natural response in moments of imminent danger.
In investing, though, that eternal logic is flipped on its head and confuses many repeatedly. Let’s explore it a bit more.
How do you think one can make money owning stocks? We want to buy them low and sell them high while we potentially collect dividends in between.
Our nature would make us sell at the bottom, though, and buy at the top — the exact opposite. Selling at the bottom resembles running away from the noise in the bushes; we do it out of fear. Buying at the top may feel like joining a happy celebration that you don’t want to miss out on. This kind of buying and selling happens in the elusive comfort of the crowd, with others right by your side, which is also an environment in which we usually feel safe. It’s all appropriate behavior almost everywhere, but in stock investing.
Why would a good, healthy, growing businesses ever sell at a low, attractive price? Most often than not, it actually trades at a full price or happens to be overpriced.
The best buying opportunities arise when investors panic and sell. They react as I did to a snake pit. They jump and leap in the opposite direction. The crowd runs one way, yet a handful of calm, collected, disciplined, and deliberate investors quietly buy.
Not every falling stock is an opportunity; it would be too easy! Only sometimes can some of them be promising buy candidates for discerning stock pickers. It’s that very time when we go against our nature, and thus, against the crowd, we make the biggest strides in our investing pursuits.
In times of enthusiasm and euphoria, we let the crowd run wild while we quietly step aside and wait. Not giving in to the fear of missing out when others happily bid up stocks to unreal levels is indispensable in successful stock investing.
Needless to say that some of our everyday responses to our primal instincts might be disproportionate anyway. When somebody cuts us off on the highway, when an ATM swallows our card, when we miss a plane, our brain and body respond as if it was a fight or flight moment, but it usually isn’t. It’s a healthy revelation that it’s not all a life or death experience.
Even more so in investing, though, it’s helpful to pause, catch a deep breath, and give it some serious thought. It helps to realize that we might need to go against our nature and the crowd, override our instincts, and do exactly what Warren Buffett suggests: “Be fearful when others are greedy. Be greedy when others are fearful.”
And when we go on a hike in the woods, we still watch where we step.
The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.
This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.