This well-known proverb may be applicable to the stock market. A recent article in The Wall Street Journal, by Morgan Housel, highlighted “three mistakes that investors make over and over again”.
First, Mr. Housel suggested that investors incorrectly predict their future emotions. Most investors feel certain that they can weather down turns, when in fact, as the markets drop, more and more investors lose their courage and typically sell at or near the bottom.
Second, investors tend to forget how common volatility is. Markets and individual stocks are prone to significant price movement. As Mr. Housel wrote, “if you don’t understand how normal big market moves really are, you are more likely to think a pull back is something unusual that requires attention and action”.
Mr. Housel’s third investor mistake was, “trying to forecast what stocks will do next”. On any given day, there are any number of forecasts, in any direction. Investors would be well advised to recognize that “you have no control over what the market will do next. You have complete control over how you react to whatever it does”.
This writer can attest to the truth of Mr. Housel’s observations. Standard & Poor’s introduced its first stock index in 1923. The S&P 500 index, in its present form began on March 4, 1957, thirty days after my first day in the equity research division of National Bank of Detroit’s Trust Department.
Remember, over time, the stock market has gone up. Despite periodic, substantial fluctuations, it seems that, eventually, the averages attain new, all-time highs.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®