Humans are very good at sorting and analyzing data and using that data to make decisions – not as good as computers but still very good. The world is full of examples of advancements in science, medicine, technology, insurance, traffic safety, education and all sort of other areas where we have been able to discover breakthroughs by collecting and analyzing extensive data.
Often, however, we are in situations where we do not have complete data and yet we still need to make a decision. For that, evolution gave us the ability to make decisions based on a range of cognitive biases. Sometimes we call these biases instinct, experience, shortcuts, or educated guesses. And these biases can save our lives, like when we are in the woods and something rustles in the bushes, we jump back even though we don’t know for certain there’s a tiger or bear ready to attack. Our ancestors who did that tended to fare better than the ones that didn’t, and that response is now hard-wired in.
Some examples of getting ourselves into trouble due to relying on cognitive biases rather than analysis include …
· Hearing about one carjacking causes us to conclude crime is rampant and cower in our homes even though data shows it’s actually down.
· A friend is diagnosed with cancer shortly after having a flu shot and we vow to never get one in spite of the fact that this is mere coincidence.
· The price of eggs goes up and we are convinced the economy is a mess even though egg supply has been disrupted by a virus killing chickens and has nothing to do with the economy.
· We hear about a tech company laying off 10,000 people and are paralyzed with fear of job loss even though the economy overall added half a million jobs the same month.
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Unfortunately, as individual investors, we often let our biases drive our decisions when analysis is what’s called for. For instance …
· Over cocktails with a friend we hear about how much they’ve made on a particular stock and we finally buy it, only to see it plummet 30% in the next 10 days.
· The news reports the Fed is worried about inflation causing a market correction and we sell all our stocks at a loss.
· We take a loss on a stock in an industry sector and write off the entire sector even though there are other companies with a strong story, strong numbers, and strong charts (what we at Cabot refer to as their SNaC analysis) that are very much a buy.
Investing based on the latest headlines is generally a bad idea for the same reason. Responding to a market correction by deciding to “sit out,” moving your money to money market funds and other low-growth, low-yield instruments can be similarly bad.
Warren Buffet, who is certainly among the best investors of our time, put it succinctly – “when the market is greedy, be fearful. When the market is fearful, be greedy.”
We’re in a somewhat turbulent period with a range of economic indicators good and bad. That’s why investing sentiment among consumers is still primarily bearish. The market remains considerably fearful right now, and as Uncle Warren predicted, there are opportunities to find winning stocks.
That’s why sentiment among institutional investors is moderately bullish.
I’m not saying this is a no-brainer. Investing in the stock market is never easy, and always carries risk. And the turbulence of the past year gives plenty of reason to be cautious. But, with the right techniques, strong research, timely insights, and careful stock picks there are buying opportunities that will produce growth, income and value for smart investors.
Institutional investors are confident because they have their research analysts. You can too. Having an expert analyst in your corner can give you the confidence to invest successfully.
Given the current environment, you may need to allow for longer holding times. Averaging into stocks is generally a good idea. And setting appropriate stops may help you sleep better at night. But index funds, money market accounts, and bonds aren’t going to help you outperform the market. Only stocks can do that.
As hockey great Wayne Gretzky said, “you miss 100% of the shots you don’t take.”
Have a great game!
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