Believe What You See
“Believe nothing you hear, and only one half that you see.” Applies today as much as it did nearly 200 years when first remarked by Edgar Allan Poe. With news of a banking crisis, an ever-looming recession and an even tighter credit market, it’s easy to lose sight of the tracks of your prey when your distracted by the sounds of the jungle. And let’s be clear: the financial markets are more similar to a rainforest environment than most investors give themselves credit for.
From the day you step foot into the financial assets environment, people are trying to figuratively skin you alive. The brokers require commissions, the trades involve slippage (paying a different price than expected), the gurus, coaches and authors (full disclosure, I am a published author) all require compensation for their services and this is all supposed to come out of the same pool of money you intend to grow. Couple this with the notion that whatever you are buying, someone is selling to you, and they are 100% not in the philanthropy industry. They are there to make money, by you losing money, and taking the other side of the trade. There are detours, dead ends, traps and pitfalls in the markets, so there is no use fooling ourselves that this type of environment is friendly, because it is painfully not.
But when you know what to look for, have experience, and can rely on things that you’ve seen to interpret current, but different situations, the uncertainty that is so synonymous with investing can become a little less imposing and a lot easier to decipher.
Looking at the chart of SPY, which we’re using as a barometer of the current market environment, its clear to see that this recent downtrend bottomed in October, nearly 6 months ago this week. That’s half a year ago! But with no shortage of bad news, it’s easy to lose sight of that for sound of doom. Everything sounds so bad. Interest rates are up, credit is tight, war is being wage and being threatened, the labor market is cooling and inflation is still up although slowing down. All of this for sure makes it hard to see over the noise.
If we apply the words of Edgar Allan Poe to the current market environment, it’s a lot easier to digest that we are actually in an uptrend; higher highs and higher lows. It’s on the chart, right in front of us. But if we listen too closely, we won’t have the conviction to actually believe what we see. That is the power of crowd psychology. The phenomenon of being more influenced by the thoughts and opinions of our peers than our very own tried and tested judgement.
Just because a car slows down does not means it stopped. The same for a trend. Just because a trend slows down does not mean that it has stopped. It is slowing, just like a car that has a thousand-mile journey ahead that hits traffic. The trip is still on as planned, and may even accelerate once the incidents and accidents begin to clear the way. I hope that this analogy helps.