Stefan’s weekly: Social Proof and Market Behaviour in the context of the recent Market Turmoil

Dear Ladies and Gentlemen

I received quite a few mails and even calls from readers concerned about the recent drops in equity markets.

I truly understand people being worried.

It is never pleasant to see the value of one’s portfolio go down. However, unfortunately and as inconvenient as it may seem, it is all part of it, it is all part of being an investor. Markets move up and down and while it is a pleasant feeling to be an investor in an uptrend, it is rather annoying to be an investor when markets are going down. Therefore, you should adapt your investment strategy to your risk appetite.

I personally believe that if you are an equities investor investing in companies with solid business cases, producing regular net free cashflows being at least partially distributed to investors, you will be receiving dividends even if the underlying equities are down. Those dividends you may spend or reinvest and over time such equities will move up again.

I know, this is not a very sexy investment strategy, it is much cooler to find the next apple, amazon and Netflix but the chances to find them are very slim especially if you want to be among the first ones to discover them and the risk of having discovered a company with a great business case that will never make it is actually very high.

Now, two of my friends replied yesterday to my last weekly mail’s message on social proof, quoting the part where I mentioned “There may come a situation where a lot of people seek exit through a small door “. This certainly became reality during this very week, only, I wrote about it in connection with real estate investments and this week it happened mainly in all other markets.

Anyway, let us have a look at herd behaviour. I very much believe that heard behaviour is probably not the most profitable investment strategy. Investors employing a herd-mentality are forced to constantly buy and sell their investments following the latest investment ideas or market noises. You know, it is extremely difficult if not to say impossible to time trades correctly and to ensure entering a position right in the beginning of a trend.

I would even go as far as to say that when a “herd investor” gets to know about a trend, the trend will probably already have matured, and the strategy’s wealth-maximizing potential will possibly have already peaked, which would mean that herd following investors are late buyers and thus most probably late sellers, or in other words herd-following investors will likely be entering the game too late and lose money as those at the front of the investment crowd will already move on to the next investment opportunity.

Now, Ladies and Gentlemen, this is a very simplified way of explaining things, but I think if you take away from this weekly mail the idea of being loyal to your investment strategy without trying to time your investments too much and without being worried too much about what others are doing, over time your investment returns should be higher than by acting the other way around.

And as always, Ladies and Gentlemen, if you want to share any of your thoughts with me, please feel encouraged to do so but please don’t forget (instead of hitting the reply button) to send your messages to:

smk@incrementum.li

Many thanks, indeed!

And now, Ladies and Gentlemen I wish you a great day and weekend!

Yours truly,

Stefan M. Kremeth