Don’t personalize the stock market

“A stock doesn’t know you own it.” – Warren Buffett

The same can be said for the overall market as well. However we investors have a tendency to personalize these things. The past five years has been a difficult for investors. Especially for those investors who have fought the rally all the way higher. Those who did so have often been enamored of one theory or another on why the economy (and stock market) were headed for a fall. Unfortunately the market doesn’t care about your theories.

A number of bloggers this week have written about how it is that so many people got the market so wrong for so long. These posts constitute a mini-course in markets, trading and investing. A sampling:

Cullen Roche at Pragmatic Capitalism writes:

The good news is it’s never to late to learn from mistakes.  I’ve made plenty of mistakes over the last 5 years.  But I always try to learn from mistakes.  So the question is, will people actually try to approach the monetary system and the economy objectively, rationally and apolitically?  Or will they continue to expose themselves to the same biases and ideological pitfalls that have led so many people to fall for the fear trade?

Greg Harmon at Dragonfly Capital writes:

Just admit that you were f***ing wrong and move on. And when you do, do not then fall back into the Postponement, Rationalization or Decay to try to explain why. Say it like this: “I was just Wrong. This is what I think now.” Some may not appreciate it but most will. We all make mistakes. Admit them, accept them and move on.

Barry Ritholtz at the Big Picture writes:

And that is what cognitive dissonance is all about. Its coming up short in your forecasts, and making all the usual excuses. Its rationalizing why you are right and the markets are all wrong. Its doubling down on the bad trades, despite the obviously failure of the original thesis. Its sticking to your story no matter what the facts are. “Who you gonna believe, me or your lyin’ eyes?

It is the triumph of narrative over planning, ideology over facts, politics over data, emotion over intelligence.

Here is the big caveat. The market can always go down. These posts might even be taken as some sort of contrarian convergence. There are still serious problems in the economy as NDD at the Bonddad Blog writes:

But I think the positive narrative that focuses on stock market returns has also utterly failed. As it happens, this morning I was again pondering the simple fact that while the economy has been making positive strides ever since mid-2009, it hasn’t been good enough. On a per capita rather than overall basis, many if not most markers of individual well-being have stalled out, or at least are well below their pre-recession peaks.

You can’t control the economy. Nor can you control the stock market. All you can do is try to manage your own behaviors.

So if you missed a big chunk of this rally, or even if you didn’t, take a look at these posts and think about how they apply to your own investing. We all make mistakes. It is human nature. You will likely find that somewhere along the way you let your own feelings, or ideology, get in the way of your investing. The challenge is to prevent yourself from making the same mistakes over and over again. The stock market may not know what you do with your money but your portfolio certainly does.

Items mentioned above:

The fear trade has been demolished.  (Pragmatic Capitalism)

You Have Been Calling for A Crash for 6 Months and Been Wrong, Now What?  (Dragonfly Capital)

Ideologically driven investors are mad because they have missed the rally.  (Big Picture)

Failed narratives: a reply to Noah Smith and Barry Ritholtz.  (Bonddad Blog)

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  • Tadas ViskantaAbnormal Returns has over its seven-year life become a fixture in the financial blogosphere. Over thousands of posts we have striven to bring the best of the financial blogosphere to readers. In that time the idea of a “forecast-free investment blog” remains as useful as it did six years ago. More »

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