The Irrational Investor

It is correct to approach market timing with a positive
attitude, as well as positive expectations. To feel confident
that your strategy will not only be quite profitable, but will
also protect you from the inevitable declines that always occur
in the markets.

However, I am concerned that some market timers take an
unrealistic approach.

Elevated Expectations

The unrealistic approach to market timing is the expectation of
instant gratification. The expectation of immediate gains, and
that losses are not only "not" something to be expected, but
also "not" to be tolerated.

Part of this is caused by unrealistic advertising promises by
timing services (as well as many other trading services) in
advertisements found all over the internet. But part is also
caused by investors wanting to believe that easy money is there
for the taking.

There is "no" easy money. Market timing works, but it takes
time, commitment, patience, and the ability to stick to a
strategy even when friends, TV commentators and news events are
pressuring you to do the opposite.

Minimizing Unpleasant Consequences

Many new market timers approach the markets with a tendency to
minimize the very real potential for unpleasant consequences and
to be overly optimistic.

Do you remember Yale economist Robert Schiller's book
"Irrational Exuberance?" Published in the year 2000, it was
widely criticized. At least it was until the bear market chopped
50% to 80% off the S&P and Nasdaq (and off many portfolios).

Apparently, lessons learned from history quickly disappear from
the minds of Mr. Schiller's aptly described "irrational"
investors. Many have already forgotten the harsh lessons of the
bear market of 2000-2002. And if they do remember, they downplay
what they learned.

Long-term planning is unimportant to the irrational investor.
Yet interestingly enough, market timing actually defines long
term planning. Setting in motion a plan to grow your investments
over time, and to protect them from losses, is the opposite of
speculative trading.

We hope no FibTimer subscribers fall into the trap of having
elevated and irrational expectations. Almost every week we write
commentaries designed to help our subscribers know what to
expect, so that they are prepared for whatever the market throws
at us.

Market timers with elevated expectations will abandon a strategy
after an inevitable small loss or two. As a result, they wind up
locking in those losses without giving the timing strategies,
which work quite well over time, a chance to perform.

Having expectations that are unlikely to be met is a sure fire
way to making poor emotional decisions, always at the wrong
times, and usually creating losses that should never have
occurred. Below is a list of several common irrational and
overconfident traits.

Irrational Traits

  Irrational investors tend to underestimate the market. They are
usually bullish and fail to recognize that the stock market can,
and will, take away profits.

  Irrational investors do not want to hear bad news during a
rally, and do not want to hear good news near the bottom of a
correction. The word "greed" comes into play here. Take my word
for it, there are more than enough savvy traders out there who
can and will easily relieve greedy investors of their profits.
They are experts in the psychology of traders, and know that
most market participants will hold onto positions too long.

  Irrational investors hate admitting mistakes. It is nothing
more than allowing your ego to guide your trading decisions.
Irrational investors hate to admit they've made a bad decision.
This can result in market timing buy and sell signals being
ignored, or second guessed.

  Irrational investors often have a herd mentality. Though they
may think they are acting independently, they are not. While
market timers often go "against" the crowd, irrational investors
are drawn into making decisions based on TV and radio
commentaries, news events, as well as friends and relatives who
can and often do exert a great deal of emotional pressure.

Don't Be Swayed By Crowd Psychology

The "majority" of investors are the most bullish at market tops
and the "majority" of investors are the most bearish at market
bottoms.

And remember, this is not just something that happens to the
other guy.

Each is absolutely sure of his or her position, and if they can
talk you into following them, you will be one of the many tens
of thousands who "buy at the top" or "sell at the bottom."

In short, don't be swayed by crowd psychology. It is often the
very opposite of what you should be doing. That is what market
timing is designed to defeat. Unemotional decisions, issued by a
tested strategy, replacing emotional ones.

It has been said that "Nothing will stop the truly irrational
investor." Hopefully that is not always true.

About the author:
Editor

Frank Kollar
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