29-05-10 – Harry Exploits Scared Investors
Harry sells $30,000 worth of bonds–then fully exploits someone else!
Harry realizes that, in the stock market, there’s always a buyer for every seller. He sighs and wishes, in one sense, that it wasn’t true. For Harry to do so well, he has to take advantage of other people.
For example, this week he sold $30,000 worth of short term Canadian government bonds, and he used the money to buy the international stock market index (XIN.TO) and the U.S. stock market index (XIC.TO) Somebody—likely somebody afraid of the falling stock markets—sold those stock indexes to Harry. It could have been the same person Harry sold his bond index to. Pity them.
They were probably afraid to see the markets drop 10% during the past ten days, so they unloaded their Canadian and International stock index holdings to buy a safe, short term Canadian government bond index. They didn’t care that they were selling something cheap to buy something expensive. They based their decisions on fear, instead of logic.
Harry coolly sips at his beer and explains:
“My little balanced portfolio will beat more than 95% of balanced actively managed mutual funds. And that figure might even be conservative.”
Pressing for an explanation, Harry continues:
“Most investors, including most professionals, aren’t logical. They’re cowardly. But their cowardice sends them running to the fire instead of away from it.”
Then I pressed Harry, to see if he was scared of the upcoming situation that Europe was in, courtesy of Greece:
“Come on, don’t be silly,” he said. Nobody is going to remember this little economic blip years from now. It’s going to be a non issue.”
“Quick,” Harry shoots at me, “How far did the markets drop after some nutbars hijacked a couple of airplanes and flew them into our symbols of American capitalism in 2001?”
“How far did the markets slump when George Bush pushed the U.S. into a War with Iraq in 2003?”
“Can you guess, within 500 points, what level the DOW dropped to last year?”
“Humans,” suggests Harry, “aren’t wired to invest money. Most of them react fearfully without a sense of history, and without any kind of long term memory at all. Perfectly rational people react irrationally when it comes to money. When the markets fall, it’s a sign that there are more sellers than buyers. And when the markets rise, there are more buyers than sellers. It’s that simple. People and their craziness is what move the markets.”
Harry then went on to suggest that no amount of financial training or education can make you a good investor. “A few people are born to do it,” he says, “But if you aren’t born to do it, no amount of financial education is going to give you the ability to think independently and logically. Whether you manage your own puny portfolio or a multi-billion dollar mutual fund, if you’re not born to invest, you’ll react like a lemming. “
“Real investors,” he continues, “take advantage of the fears and greed of others. That’s just the way it is.”
What do you think? Is Harry right?