I got up this morning, a day after a big drop in the stock markets (which I said earlier would happen sooner or later), intending to write an article about the what, why, how, and what next. However, I quickly stumbled across the following written by Jeff Macke at Yahoo! Finance. I could easily go ahead and write down what I had written in my head, but it was very similar, and probably not as good, as what Jeff has to say below.
“July brokerage statements are going to be sent out today and for the first time in five months the percentage of you who throw them away unopened will rise. In fact, while ratings on financial TV and traffic on stock websites will almost certainly show an impressive spike this week the number of you who log in to your e-broker to see how your portfolio is doing will drop.
“The reason is simple: If you’re an average investor, or even a better than average investor, there’s a good chance you lost money in July. You don’t want to look at your statements because you know there’s bad news inside. The impulse isn’t any different than when you’d want to hide a bad report card from your parents as a kid. That isn’t an indictment of your maturity or sophistication. It validates your humanity. We are hard wired to avoid what is painful. The last few days have reminded us that investing can be a scary, painful experience.
“You’re looking for answers where there really are none. What we know is that after spending most of the month tip-toeing around like they were trying sneak out of a bear’s den investors finally gave into their fear and stormed the exits yesterday. The result was the worst day since April 11th. The Dow dropped 1.9%, while the S&P 500 and the Nasdaq both fared slightly worse.
“Mass psychology isn’t a new science. In 1895 a French social psychologist named Gustav LeBon wrote a book called “The Crowd: a Study of the Popular Mind” in which he basically noted that people tend to do stupid things when operating as a group. His analysis was simple but the conclusion holds. This sell-off is very much a global event. Yesterday all ten sectors fell between 1.56 and 2%. You’re going to hear all kinds of fancy economic theories for catalysts but the most obvious explanation for the selling is that the masses are scared.
“I can’t tell you specifics on how to play this but I can tell you how I avoided getting wiped out in 2000 and 2008. I simply stepped out of the crowd. This isn’t a time for over thinking. It’s a time for taking a measure of your emotions. If you’re scared now you’ll be more frightened later. Control your risk. If you didn’t sleep last night you’re too long stocks. If you’re afraid of your statements it’s because a little voice in your head knows you’re taking too much risk. Get in front of that emotion before it reduces your intellect to that of the masses. Buckle up and look for opportunities. There are times for bravery and times to simply buckle up. History suggests the selling will end when we’re all good and scared. We’re not there yet but we will be, most likely sooner than you think.”