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The Fear Industry has been Working Overtime

The Fear Industry has been Working Overtime

May 30, 2023

It is often difficult for investors to ignore dire predictions of the future - but it is important to keep fear in check and stick with your investment plan! 

Emotions are the enemy of sound investing.  Stirring up those emotions generates big profits for media companies.  The Indignation industry characterized by political talk shows makes money by making viewers angry.  Never mind nuance or multiple points of view – the goal is not to inform but to agitate.  Angry viewers are loyal viewers! 

Anger, however, isn’t nearly as toxic to investors as fear.  Fear is the emotion behind most investment regrets.  (Greed is behind the rest…).  And nearly all the media has been working overtime trying to generate fear lately.  Just as angry viewers or readers come back for more – so do fearful viewers and readers!  For the past month, media would have you believe that a debt default was inevitable.  In this politically polarized environment, neither side would ever give in.  And the crazies (depending on your viewpoint – on the left or the right) would rather see the nation default than compromise.  The media told us that default followed by a market collapse and economic calamity was a near certainty. 

On top of this, the financial media have been predicting an inflation and interest rate driven recession for well over a year now.  Yet, the economy keeps humming along.  The old adage apparently still holds true – that economists have successfully predicted 9 of the last 2 recessions!

Investors are subjected to this never-ending barrage of dire predictions.  The so-called “experts” who make these predictions are brimming with confidence in their own soothsaying.  It is hard not to want to hide your money under your mattress.   Yet we have learned from repeated experience that making major investment moves based on predictions of economic calamities rarely leads to positive results.  There are multiple reasons for this. 

First – you simply can’t predict the future better or faster than the markets can.  The market is an excellent odds-making machine, placing bets at every moment on the future direction of the economy, interest rates, inflation, tax policy, and on and on.  Your own opinion, no matter how well informed you think it is, is no match for the predictive abilities of the market.  Regarding the most recent fear of US debt default, the markets were quite consistently placing the odds of such default much lower than the “talking heads” in the media.  It appears now (though the outcome is not yet certain) that the market’s lack of concern will prove prescient. 

Second – even if your prediction regarding a future negative event is correct – profiting from your prediction is very difficult.  Let’s take predictions of a recession.  I can with 100% confidence predict that there is going to be a recession.  But there is no way I can tell you when.  Economists have been broadly predicting a recession since early 2022.  Many are still calling for one.  Yet since Sept of 2022 the stock market is up 15%.  How long are you willing to wait for your prediction to come true?

Third – To avoid pain from a negative market event you need to correctly time not only your exit from markets, but your reentry as well.   Let’s say you believed to your core that the US government was going to default on its debt and that markets would collapse, and a severe global recession would follow.   Let’s say you sell your investments and put all of your money in your mattress.  Further, lets say you are right, and the government does default.  Markets likely would panic for a time – and you might feel pretty smug for a while.  But what’s your endgame?  To profit from this move, you now need to know when the crisis will end so that you can put your money back to work.  Will the default be quickly corrected as politicians fear the wrath of voters?  Or will things completely unravel?  There will be no way for you to know but one thing I can confidently predict is this – markets will recover long before media pundits predict that the future is risk free!   Or to use the example above – if you had exited markets (based on the advice of all those economists) in September of 2022 – what will you do now with markets up 15%?  Do you accept that you were wrong and re-invest?  Do you stick with your conviction, knowing that you now require a 15% downturn just to be able to buy at the price you sold at? 

The opposite of fear perhaps is acceptance.   Successful investors simply accept that volatility is simply the inevitable price of investment returns.  If you want higher returns, then you need to accept more volatility (by putting more of your money into stocks, say…)  If you can’t afford so much volatility (because you need income from your portfolio perhaps, or you just can’t sleep at night) then you diversify your portfolio more broadly with less volatile investments (and accept lower returns over the long run).   Having accepted volatility as the price of returns, it is easier to stick with your diversification strategy even as markets gyrate.  Crucially, investors who stick with a sound investment plan are more successful over time than those who change their investment positions continuously based on the ebbs and flows of their emotions as influenced by the latest political or economic news.