How fear can control the share market and how to invest without fear

Welcome to Finance and Fury. Today we’ll talk about what rules the market, fear, and why it is important to have some fears but also overcome them

Fears rule the market – and the more fear makes the market more volatile 

1. Occurs on both side – fears of losing money – fear of missing out on returns
2. Drives large crashes and drive large rallies – obviously selling and buying affect price – but the fears can be behind the behaviours of buying and selling

Behaviours of the current market –

1. Volumes are spiking on the market in trades –
   1. See a spike in volumes in large movements on ASX –
      1. March – Saw double the average in trading
   2. Been a record surge in Nasdaq volume more recently – also their equity call volumes hit their decade high –
      1. Calls – options that are essentially leveraging to buy the market in the future – works well when the market goes up
   3. At the institutional levels – Goldman’s prime desk notes that while overall hedge fund gross leverage fell -2.5 pts to 247.1% (96th percentile one-year), net leverage rose +1.0% to 75.0%,  the highest level in over two years
      1. Low was in April – Gross was 229% and net exposure was about 62% – so up over 10%
   4. E-Trade – reported that its daily trading volume in April was more than three times as large as it was in the same period last year – other discount brokers have reported similar figures
      1. TD Ameritrade – 3m trades a day in April – 800k year earlier
   5. One potential contributor – lowering or removing commissions – in rational terms – getting rid of commissions shouldn’t have had a substantial impact
      1. Going by the numbers – say you invest $5k – brokerage in USA is cheaper than AUS – about $5 to $10 max – can get about $10 in Aus – is about 0.1% or 0.2% – saving this cost won’t have much effect on the ultimate outcome
      2. How much trading would you have to do for it to make a difference? But free is always appealing – and the fear of missing out on a free lunch can be large
      3. nobody really knows what is driving the massive spike in trading – people might just have a lot of time on their hands – or as Richard Thaler mentioned – it is replacing gambling – casinos are closed and there were no sports to bet on
         1. $400bn gets gambled each year – online is about $50bn
         2. Small trader call buys up massively – average since 2000 was about 2m contracts – spiked to 12m

Fears at the moment – nobody is immune

1. Institutional fears – institutions like investment managers have lots of fears –
   1. Investment managers – FOMO – not outperforming benchmark
   2. Why? The success of their future is reliant on performance – people will withdraw funds from them so their MERs income goes down
   3. If they are sitting on the sidelines in a market rally – and underperform in the short term – bad for their longevity
2. Individuals – Fears of missing out – or fear of losing funds –
   1. Market panics caused by overselling – market bubbles buy overbuying –
      1. Neither is based in rational but hope –
   2. Fears can be rational – why invest? Fear of not having enough in retirement or Fear of inflation kicking back in
   3. There is risk involved with investing – property or shares – or anything that has price movements – but not going to get good long term returns without risks
3. Central Banks – Fearing deflation

Can’t let fears rule investment decisions

1. Investing is an action, controlled by behaviours – emotions change your behaviours.
2. Getting a good investment midframe allows you to invest well for the long term – not letting emotions rule your investment decisions
   1. Understanding how the market behaves can help to overcome your fears of the market though

This means controlling your fear more than trying to control investments – Cant control what investments do short term

1. Fear is an emotion – Which stops you from investing
2. Starting is the hardest part – getting the right fame of mind and overcoming fear
3. But staying motivated and on track is just as hard
   1. Life gets in the way – and new things happen and crashes

How to start? Needs based plans – ignoring your emotions

1. What is your purpose for investing?
   1. What are you trying to achieve? – If you don’t know your reason to invest, you cant answer this
      1. Long term growth? Passive income?
   2. How will you achieve this? Strategies and investment options
      1. Save a deposit – Buy Property
      2. Monthly investing into Managed funds, LICs, rather than savings
   3. The most important thing is to just start – but fear will take over and indecision
      1. Information overload will be hard to overcome
         1. Diversified products help to remove this – ETFs = let someone else make the investment decisions for you
      2. Taking the plunge – Start small if you are uncomfortable
         1. You don’t need to put everything in, but a small about
         2. Some people like to jump into a cold pool, others start with feet and slowly move in to acclimatise

• Example: Like a pool of investments, some people do dive heard first into pools, but what happens when they cant see the bottom, or cant swim?
  1. If they break their neck or drown, would people say that pools are dangerous, or the behaviours were dangerous? Or if you constantly heard about the 372,000 drowning deaths every year – might be petrified of swimming
  2. Say it is your pool, or a pool you go in every day? You know what you are in for – So you know if you should dive, or slowly get in.

3. Prior experiences do affect your future behaviours
   1. Buy a property that goes down – Will you be more or less likely to buy another?
   2. Buy shares right before a crash – will you be more or less likely to think share are too risky?
   3. LESS likely in most cases – But these are some of the best long term investments thanks to GROWTH
4. Don’t let one bad experience stop you
   1. Or something you hear about – fear will come in from hearing about other people losing money

Failing at investments – FEAR = failure

1. Rational fears vs Irrational Fears – Some fear is good, but only of very risky investments, or of diving in head first!
2. Stops people from starting to invest – Fear of the unknown – well, shares are ownership
3. Investments will fall apart if you respond by fear!
   1. Doing the wrong thing – fear selling
4. FEAR leads to – following others instead of doing what is right for you.
   1. Do they know something you don’t? SO you follow them just in case, even if irrational!
   2. Buying – Leads to buying at peaks of bubbles
      1. All because people buy property doesn’t mean you should.
      2. All because people buy shares, doesn’t mean you should.
   3. Selling – Leads to selling in the crashes

5. How do you avoid this? I have some Rules when I invest: There aren’t 10 – there are 5

Rule 1) Invest for the long term with a purpose!

1. This means holding through the cycles
2. Also investing in a diversified portfolio to survive – long term!
3. Not putting more into one investment than I can afford to lose

Rule 2) Don’t invest out of hope, or more than you can afford to lose – That is gambling

1. Invest with a greater certainty
2. Avoids you chasing the risky (and unlikely gains)
3. EXAMPLE – the only losses I have in shares is from hoping they will be big returns in the short term….they weren’t

Rule 3)  Don’t do what the crowd is doing, just because they are doing it

1. that is called Contrarian investing.
2. Buy when others are selling
   1. Personally, I love doing this. Like the divorce sale of investments
3. Sell when others are buying
   1. Personally I don’t do this, as what would I buy if I sold? I just wait for the crash and get things on discount.
   2. I just don’t buy at these points, but I don’t sell.
4. You cant time the market, but you can know when things are cheap or expensive.
   1. Buy when it is cheap, and don’t buy when it is expensive

Sentiment –

Goldman Sacs put out a poll survey to traders –

2. No conviction – Then ranging from Bearish, Slightly bearish, Neutral, Slightly Bullish, Bullish – 2% had no conviction
   1. Bearish – bears think the market will go down – swipes down like bear claws – Bearing is 17% and Slightly bearish is at 32% – 49% in total
   2. Neutral is 14%
   3. Bullish – bulls think the market will do up – bulls buck up with their horns – 7% Bullish and 28% slightly bullish – 35% in total
3. Traders are a segment of the market – but looking around based around volumes on different sides – can see the average bulls and bears
   1. With the Greed and Fear index – if you bought when it dips below 20 and sold over 90 or close to 100 for past 3 years – buying at bottoms and selling at tops – not saying that it is a good strategy – not advice – but find it interesting
4. Robert Shiller coined the term Narrative Economics – major stories are contagious and spread – In standard economic theory – fundamentals are considered – make decisions based around things like fair valuations, interest rates, and expected profits before investing – it seems like today – the narrative is often more emotionally compelling and resonant than an argument about valuations or boring economic terms –

Rule 4) Don’t listen to the media – Their job is to sell fear and there is always a new crash

1. Try to sell when to buy: Look at the fads of investments – short term holds – but longer term someone is left holding the bag.
2. You don’t want to have to change your investment wardrobe every 6 months.
   1. What do you replace it with? When you sell an investment, it goes to cash
   2. Then what do you buy?
      1. You are back are square one – Figuring out what to invest in now!

Rule 5) – If in doubt, remember rules 1 to 4!

1. Summary – Just start, but don’t dive in head first unless you know how deep the pool is.
2. Come up with your own rules over time as well. And avoid the fear!

Getting started in investments and keeping going is all about your behaviours.

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