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The Trepidation Trap

Summary:
When markets decline, investors worry. When they decline sharply, investors get frightened. If selling is extreme, it leads to fear and trepidation. What might signal a more favorable climate? Holding “support?” A big rebound rally? Favorable news? Mustn’t there be something? Beware of these high-profile traps. My own comments follow in italics. The “sucker’s rally” trap. This term was applied by many to Wednesday’s historic market gains. [If declines like those of the last few months are bearish, shouldn’t a rebound suggest a glimmer of hope? I am always suspicious of those who resort to calling names about anyone who disagrees with them].The bogus and backward comparison trap. Today we see pundits, mostly those on my “reliably bearish” twitter list, explaining that huge

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When markets decline, investors worry. When they decline sharply, investors get frightened. If selling is extreme, it leads to fear and trepidation.

What might signal a more favorable climate? Holding “support?” A big rebound rally? Favorable news? Mustn’t there be something? Beware of these high-profile traps. My own comments follow in italics.

  • The “sucker’s rally” trap. This term was applied by many to Wednesday’s historic market gains. [If declines like those of the last few months are bearish, shouldn’t a rebound suggest a glimmer of hope? I am always suspicious of those who resort to calling names about anyone who disagrees with them].
  • The bogus and backward comparison trap. Today we see pundits, mostly those on my “reliably bearish” twitter list, explaining that huge rallies like Wednesday’s were typical of bear markets. [Start with a couple of hundred variables. Do a screen for what current trading shares with a few bad times. Your post writes itself. The handful of examples provides little evidence of what might happen next. You cannot do reliable statistical evidence based upon a few cases].
  • The “I remember” trap. The pundit does not use a computer screen for this. It is enough to remember some dangerous past time in history and summon up a few similarities. [Those with a different viewpoint can do the same. I remember 2011 — debt ceiling debate, political dysfunction, worries about the US credit rating, and no sign of compromise in Congress. Consumer confidence collapsed, even though the crisis was averted. Markets declined about 20%. And then they swiftly rebounded. Finding an example or two is interesting, but not real evidence.]
  • The wise market trap. The financial news industry depends upon finding some message in each and every market move — whether there is a logical reason or not. When expert guests are interviewed, they are challenged about what the market “is telling us.” [If you are a serious investor making your own decisions, you believe you have some “edge.” This means that markets are not completely efficient. You take advantage of the emotional reactions to establish or sell you sound positions. You realize that the market “forecasts” many events that never happen — especially recessions.]
  • The laundry list trap. It is easy to recite a litany of problems. These currently include slowing global economic growth, Fed policy, political uncertainty, trade issues, Brexit, commodity prices, and regional military conflicts. [Most do not recognize that there is always such a list. As problems are addressed, even partially, new worries replace the old. Bull markets thrive on a long list of fully-recognized worries. It is the surprise that represents danger].

Understanding these traps is essential for successful investing. Those trying to scare you witless [TM OldProf euphemism] are on a mission to sell gold, annuities, structured products, page views, TV ratings, or newsletters.

You will do much, much better with a diversified portfolio suited to your individual needs, but it is easier said than done. The traps are everywhere.

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