There are two sides to the investment management coin: the maths or calculations and the emotions or attitudes that exist concerning money. It is a truism that 90% of financial decision-making is driven by emotions and 10% by logic and reason. This is why it’s wise to evaluate the cycle of market emotions in this topsy-turvy world.
Starting in December 2021, markets worldwide reversed sharply from their overall high and moved into bear market territory. In rand terms, the popular US Nasdaq Index, with its large technology weighting, fell by 29% and both the MSCI World Index and the S&P 500 Index fell by 20%. In a matter of a few months, these movements caused investors’ emotions to run wild.
In his book Supermoney, Adam Smith described the concept of a bull market by comparing it to a glamorous party or ball.
“We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment, the Black Horseman will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking ‘What time is it? What time is it?’ But none of the clocks have any hands.”
Time will bring the answer and settle the debates over the bull market, but the party – as glamorous as it was – is over, and our euphoria has changed overnight into anxiety, denial and fear.
Those participating in the market, be they asset managers, wealth advisors or investors, are all affected, while the cycle of market emotion is unstoppable. More important still is our own emotional intelligence – how we experience and interpret these emotions and how they influence our investment decisions.
Warren Buffet’s famous saying provides a simple answer: “Be fearful when everyone is greedy and greedy when everyone is fearful,” which, of course, is more easily said than done.
I recently undertook a survey among some of my colleagues and the outcome indicates that we will probably experience a few more emotions before we get to hope and relief. The mass liquidity of the past decade, then, is now a thing of the past. While we currently are experiencing headwinds, these are precisely the times in which opportunities arise.
The table is set for a red hanger sale – and indeed, this has to some extent already started. This means that the long-term investor has considerable reason for optimism. For the pensioner, the environment is challenging, good planning is important, and the guidance of an experienced advisor with good emotional intelligence is a necessity.