It is an unfortunate and sad reality that most people do not like to think for themselves if even at all. That is why television reality programs and entertainment news shows and television itself for that matter are so popular: it gives people a break from thinking about their own lives and gives them the opportunity to watch others live their lives.  The same attitude has moved into the investing practices of many individuals as well.

I came across an article recently called Markets face ‘irrational pessimism‘ which touched on this exact point: that people do not use their own minds but rather simply follow the crowd.  While the focus of the article is on General Electric (GE) (which for transparency’s sake I will mention that I am not a shareholder), the overriding theme is how certain companies, although they are struggling in some ways, are seeing their stock prices driven way down below their true values based on nothing more than media hype and panic.

While the point of this post isn’t the role media plays in the economy’s downturn, it bears mentioning that many people look to news outlets as their sources of financial information, so all of the “doom and gloom” and pessimism starts there and filters down to the common people.  That being said, some of the responsibility falls on these media outlets, but the bottom line remains that people should always do their own research into financial matters.

Getting back to the point, people are too quick to act upon each and every piece of news they hear whether in the media or from friends/family.  It is just too easy to take each piece of advice or news at face value and avoid spending the time doing research on their own.  This especially true in the case of conglomerates such as GE where there are many different independently operating units that each contribute to the company as a whole (which is one of the reasons why this specific company was used as the feature in the article).  Simply because one unit in particular is struggling, the rest of the units may be operating at optimal efficiency but the focus is always going to be on the bad news.  This causes problems when the information available only concentrates on the negative, giving the impression that the company as a whole is doing poorly.  That in turn leads to a sell-off of the stock leading to a severe under-valuation, similar to the way the opposite happens with unnaturally positive coverage and its cause of artificially inflated pricing.  The article further expands upon this issue in depth regarding the valuation of the parts versus the valuation of the whole regarding companies with multiple divisions.

This trend is further evidenced when one particular company releases negative news and as a result, an entire sector is dragged down.  How the results of one, independent company can be a sign that all companies within a sector will follow suit is beyond me, but this chain of events happens quite often in the markets. It even occurs on positive information, where a company posts better than expected profits for example, leading to an increase in share price and the sector as a whole shares in this sequence.

The truth of the matter is that most people do not have the knowledge, patience or resources-even though the last part is readily available and free from a variety of sources.  Even those who have money managers and stock brokers at their disposal are guilty of not listening to reason all of the time and let their fear take control of their financial decisions.  While at first, relating the state of the economy to a movie quote may seem improper, the fact remains that this particular line from the movie “Men In Black” holds true for much more than simply aliens and money.  

A person is smart. People are dumb, panicky dangerous animals and you know it. Fifteen hundred years ago everybody knew the Earth was the center of the universe. Five hundred years ago, everybody knew the Earth was flat, and fifteen minutes ago, you knew that humans were alone on this planet. Imagine what you’ll know tomorrow. 

This is perhaps one of the most truthful quotes ever uttered.  One educated person can see negative news as either a hiccup or a sign of things to come, but a group of people lacking the same level of knowledge and experience will see it as the end of the world and overreact, as we are seeing in many instances within the market right now.

Do you think that people are too lazy or irrational?  Have you ever made an investing decision based purely off of hearsay or an initial reaction to what others were doing?

This article, When Investing You Really Need To Think For Yourself was originally published by DollarVersity, and may have been used without the owner's permission.

People sell their stakes in investments for a number of reasons.  Some do it because they have a fear of losing money.  Others do it because they want to harvest tax loses.  Some people panic and take every piece of news (or hearsay) at face value rather than taking the time to dig a little deeper in order to find their own guidance.  The thing that many people do not do is follow the same reasoning when selling stocks as they did when they made the initial purchase.  Too many people let their feelings and emotions affect their investment decisions, which is one place that rational, level-headed decision making is vital.

First I have one simple question to ask: why do you own the stocks/bonds/ETFs/mutual funds you do?  Take some time to think about the answer for a minute or two.  It’s not the simplest question to answer is it? Maybe it’s difficult because you don’t even know why your portfolio contains what it does.  That is, at least in my humble opinion, the biggest problem among those who invest in stock.  A great majority hear something on CNBC, Bloomberg, or some other media outlet, or from a family member or colleague and invest in that company simply based on a recommendation.  In a time when people are choosing to be more frugal and efficient with their money why would anyone want to throw money around in a brokerage account and more specifically in a retirement vehicle?

There is a school of thought among some advisors that investors should keep a journal and jot down a few notes about their feelings and thoughts involved in every trade, whether buying or selling.  This is something that I absolutely agree with and recommend to people with whom I come in contact.  The point of this exercise is to actually think about each trade and record the reasons behind each transaction.  This way, when it comes time for your periodic review of your portfolio, you will have a better understanding of your allocation and why you possess each security.  In addition, it will give you some insight into your investor profile as well as your level of risk tolerance which can be of great assistance especially if you decide to bring in an advisor at any point in the future.

Keeping a journal and actually spelling out your rationale for every trade will help you in another vital manner.  In times of rough periods such as this, when certain companies see no significant change in their business strategy or performance, yet still suffer a loss in share price, you will be reminded of exactly why you purchased or sold it off it in the first place.  You will be reminded that if you bought the stock for it’s strong balance sheet or high dividend yield, or strong cash positioning, a sell-off or a little bad news won’t affect you as much.  On the other hand, if you sold a particular stock for any particular reason, and the situation is still the same, you will have the written reminder to avoid that company regardless of how attractive a value it may be until the circmstances change to one that you are more comfortable with.

By keeping track of the reasons behing your investmentment decisions, you will be in a better position to withstand unexpected changes in market attitude.  You will also be able to dismiss most of he information and rumors that are tossed around if it has no impact on any of the reasons for either acquiring or disposing of any particular stock.  This approach to investing also has a more sublte result: it will help you curb your emotions when choosing to invest by making you take a more analytical and thoughtful approach and assist you in becoming a more wise investor.

Do you journalize your investing activities or any other parts of your financial life?  Or do you simply have any other tips for keeping emotions out of important financial decisions like making investments choices (either buying or selling)?

This article, Emotions And Investing Do Not Mix was originally published by DollarVersity, and may have been used without the owner's permission.

For some reason, the idea popped into my head to look into how the consumer sentiment is figured.  You know, those surveys done by the University of Michigan and The Conference Board which tell us what consumers feel about their situations and the economy, and which ultimately turns the markets one way or the other based upon the results.  The last part is what bothers me.  The fact that a simple survey can affect so many is fairly unsettling to me, and I was curious as to just who these people were that have the power to change the direction of our investments.  The answer almost knocked me off of my chair.

I thought that maybe there was some scientific approach to the survey, and that the sample set would be representative of the nation as a whole, but the reality was much different.  The University of Michigan and Reuters partner to publish one of the most influential pieces of economic data.  The interesting part is that the procedure is to select a minimum of 500 households which will answer 50 questions designed around financial matters, and which will influence millions of people’s immediate futures.  These aren’t specially designated experts or scholars, but random households.  There is apparently no screening process for eligibility, so there is no way to know if the respondents will even be financially literate, or have the ability to process the information in a logical and rational manner. The Conference Board is a little broader in that it selects 5,000 households for inclusion in its survey, but that is still too small a sample to attempt to project it as snapshot of the nation.

The most interesting thing that I discovered was on the survey information section of the University of Michigan page under the description heading.  A full explanation of the survey was provided, as was a series of charts comparing responses with actual events.  Of course if you take the results of the survey and plaster the information on every single financial news outlet, then the rest of the people will react in a similar fashion.  That is the way the economy and media works today: if you publish the information, it will be held as gospel.  The problem is that sentiment is based on emotion. Emotion tends to be illogical, and therefore is the enemy of finances which are ideally supposed to be rational, cold, hard facts and figures.  Once the emotions of a select few enter the picture, it essentially corrupts the data, and makes it way to the masses, thereby corrupting them as well and their actions dictate what direction the economy will go.

In fact, I will go so far as to say that these surveys do not present very reliable or fundamentally sound guidance at all.  It makes me wonder why experienced and educated professional would even use this type of data at all.  I would liken it to asking random people on the street about a medical condition: you don’t know what their backgrounds are to be able to answer the question but you still take their (possibly) uneducated or uninformed opinions under advisement. Especially in tough times it is imperative to use fundamentally sound data and guidance, which these types of surveys obviously cannot provide.

The funny thing is that these days whenever you turn on the television or read a periodical, the common advice is to be extremely cautious of where you get financial advice from, yet these types of unscreened, random surveys are not only allowed to have a major impact upon the economy each month when they are released, but are heavily anticipated and trusted.

What’s your take?  Do you trust the emotions and (possibly lack of) economic understanding of random people to determine the direction of our economy?

This article, How Can Consumer Confidence Surveys Be Taken As Seriously As They Are? was originally published by DollarVersity, and may have been used without the owner's permission.