Counter - cyclical investing - why is it so difficult?
Tuesday 25 August 2015
There are are a many benefits from countercyclical trading on the exchange. "Always buy straw hats in winter" is an old saying. Only in the next bear market will you realize how much it really hurts to have added shares the portfolio at the top of the business cycle.
Why is it that so many investors make the same timing error over and over again?
Almost all investors end up with a pro-cyclical portfolio. They follow the large herd, in tune with music played by the financial media. The news reports from the exchange are to a large extent to blame. They have the thankless task to report new things each day, and even hourly, which can push prices up or down. The financial journalist M. Gburek pointed out that the emphasis is not "find", but to "find out". After the facts are known. The explanations for price changes need to be fabricated.
The herd mentality in the stock market, or the pro-cyclical investment behavior of investors, is based on the subconscious mind and related to the deep-seated desire to be part of a group. This being a member of a group helps to reduce the sense of insecurity and increases self-confidence. It is coupled with the desire and pursuit of recognition and praise. The investor will therefore share a part of the fear even if his investment decision was probably correct.
Usually investors who follow the pro-cyclical way, all end up in the same hole. Whoever desires to follow the countercyclical route must first begin to work on his own mental attitude. Not easy, but possible and especially promising.