On this episode of The Impatient Investor, Andrew discusses why irrational behavior drives the stock market and why it is much better to invest in trends that are backed by concrete market data – ones that aren’t going to come to an unpredictable and abrupt end.
“Because so much of the markets are driven by erratic human psychology, no computer program or algorithm can accurately predict market movements.”
Imagine you’re at a basketball game and you happen to hold the lucky ticket for participating in a half-court shooting contest at halftime, make the basket and you win $1,000. Once your ticket is called you walk down the court and you hand your ticket to the announcers standing on one end of the court, who in turn hands you a basketball. You think the announcer is going to tell you to walk to half court and try to sink the basket for a thousand dollars. Instead, he tells you to stay put as four cheerleaders roll this mobile basketball hoop out onto the mid-court line facing you. That’s fine. You think to yourself, it’s the same distance, there’s just one catch. The cheerleaders are allowed to roll the basket back and forth during your attempt. The hoop is a moving target. One more thing the announcer tells you. Everyone on the team attempted that very same shot today, and out of 10 players, only one succeeded. Good luck, he tells you.
If nine out of 10 professionals could not make that shot, how confident do you feel about making that basket? What if I told you that 95% of actively managed mutual funds fail to beat the market? Keep in mind that these funds employ, who use the most sophisticated computer programs incorporating the most complex algorithms designed to crunch numbers and analyze data to predict market movements. The purpose of predicting the markets is all about timing. It comes down to the basic concept of buying low and selling high. We’ve all heard that term. Knowing the bottom price to buy at the peak price to sell will maximize your gains. If professionals fail to beat the market at the timing game, what chance do you have as an individual investor?
Here’s the problem with timing the market, that machines can’t account for, you can’t predict human behavior. And because so much of the markets are driven by erratic human psychology, no computer program or algorithm can accurately predict market movements. How would you explain the current state of the stock market? Unemployment is still high and GDP growth is still stagnant. The economy has not recovered, but how do you explain the Dow currently trading at an all-time high and nearly double its historical price-per-earnings ratio.
The PE ratio that’s price-per-earnings has been a reliable barometer of whether the stock market is overvalued. There is no question it’s overvalued. Investors aren’t stopping with stocks to satiate their appetite for speculation. Bitcoin has also skyrocketed in price recently trading at nearly double its previous bubble in 2008, before coming crashing down. Investors are being driven by FOMO, fear of missing out right now and no one can predict precisely when it’s going to end. Many unemployed armed with stimulus checks and free time are investing like they have nothing to lose right now. The fact of the matter is many are going to lose their shirts when the markets correct. And if history has taught us anything, this market will correct.
Timing requires precision. It requires timing exactly when a particular stock will hit bottom and when it will peak on a rebound to maximize gains. The problem with precision is group psychology and individual psychology, both prevent predicting with precision. Mob Psychology is hard to predict. We’ve talked about this before and momentum can shift at any moment.
Remember in the movie, Forrest Gump, when Tom Hanks’s character starts running nonstop coast to coast? He gathers mobs along the way, running at his side for stretches at a time, all wanting to be part of the phenomenon and not wanting to miss out. Then one day Forrest Gump just stops his run in the middle of what looks like a Southwestern highway and decides to walk home. The huge group that had been running alongside him, asked why he stopped. He replied simply that he’s done running and he’s going home. And that was the end of that.
The current stock market ride will one day come to an abrupt end, just like there was no rhyme or reason for its meteoric rise in recent months, there will be no rhyme or reason for its abrupt stop. Nobody knows exactly when the market will peak. So you have that aspect of mob psychology timing-based investors to contend with.
On an individual level, the human psyche is typically ruled by hesitation when it comes to timing. Hesitation over when to act over a stock hitting rock bottom usually leads to the investor waiting too long to buy and paying a price higher than what’s optimal. On the other hand, hesitation over timing, the sale of the stock at its peak usually leads to holding onto the stock for far too long. In both instances, the investor prevents themselves from timing the market with precision. And that’s why timing the market is a fool’s errand. Timing is impossible because the stock market is like a moving target in the basketball example we talked about before. Timing only works when the target isn’t moving. When irrational human behavior is removed from the equation, and investment decisions are driven by data and sound underlying economic principles.
I prefer to time trends backed by concrete market data and underlying economic fundamentals. What does the data tell me about mobile home park investings or affordable housing? The data tells me that there are only about 40,000 to 50,000 mobile home parks in the US with little supply being added each year because of strict zoning laws. The data also tells me that there is a shortage of affordable housing. This trend indicates this shortage will only continue to increase while demand continues to increase.
The data also tells me the gap between supply and demand will only continue to grow and based on these trends, now is the time to jump into this asset class. And unlike the stock market and the Forrest Gump running example, this upward trend isn’t going to come to an abrupt end. A thousand mobile home parks aren’t just going to appear overnight. Where would you rather invest? In something that could end tomorrow. Or an upwardly trending asset with room to grow based on strong data and economic indicators? If you’re looking to learn more, go to www.stoptradinghours.com.