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Opposite interests and emotions

This chapter has a focus on the emotional side of investing. You have to understand that there are many conflicting interests in the financial markets. Basically meaning, everyone wants to make money for themselves. Brokers, exchanges, and financial advisors have no interest in making you money. They only want to make money for their employer. Would you make someone else rich without benefiting from it? Spending hundreds or thousands of hours making someone else financially successful? While there are a few people out there that actually have this mindset, most people have no interest in making you rich.

For a broker or exchange it does not matter how stocks or bonds are valued. They get paid when someone makes a transaction. On the other hand, for your personal gains transaction fees and other costs are crucially important. This creates conflicting interests. Many banks have financial and investing advisors. It might sound like a good idea to consult the bank you currently use. In reality your bank advisors fees may be the highest in the market. Before you get any advice, make sure you compare all applicable costs. Also make sure what your goals are and know how different types of securities work. This way you can make sure your advisor is actually saying something useful. 

32.1 Mr. Market

Benjamin Graham used a concept in his book the intelligent investor called Mr. Market. Mr. Market is your companion in your private business. Mr. Market will appear on a daily basis and can be described as a manic depressive investor focussing on the ups and downs rather than the long term fundamentals. 

The stock market will show you prices every day, sometimes prices go up and the other day they will go down. Many investors will get trapped and start focussing on prices rather than fundamentals. Many investors panic when prices go red. One of the best examples is the recent plummet in the overall stock market and basically every financial market when covid hits in 2020:

S&P 500, source Google.com

At the end of february 2020, the S&P 500 closed at an all time high of $3380. Near the end of march the price plummeted to $2300. A loss of $1000 or 33% in just 1 month. And the same thing happened to many other markets:

Dow Jones: Source Google.com

The Dow Jones dropped from $29.000 to $19.000 in just a single month. This is the biggest drop in the history of the Dow Jones. But take a look at what happens next. Both indexes did not only recover within a few months, the price is still creating all-time highs as I'm typing this article (2022). 

Around march 2020, Mr. Market really hit a depression and was offering stocks for extremely low prices. A sound company does not suddenly lose half its value in a month. Price drops were mostly caused by investors not knowing how covid would impact business. This caused a chain reaction. More investors started worrying by seeing red numbers. This is where emotions start to influence your investing decisions. Decisions you made a month ago now sound really depressing and you might start to wonder if you made the right call. But is this based on fundamentals or emotions?

Emotions and logical thinking can actually help you in these rare events. You don’t have to look at fundamentals when a virus is disrupting the world. You already know that airline companies will suffer because the first thing that will happen when a deadly and contagious virus hits is limiting contacts. Countries will shut their borders and other measures will be taken. While on the other hand pharmaceutical companies providing care in the form of masks, cleansing lotions and vaccines are most likely to thrive. This will outperform any fundamental analysis because fundamentals won’t work when these events happen.

Let say you bought shares from company X for $100 each based on sound fundamentals. In a few months, the stock price drops to $85. Would you be alarmed by your emotions by thinking you lost $15 for each share you own or would you buy even more by thinking the stock is now $15 cheaper then a few months ago?

It’s easy to let emotions guide your decisions. Nobody wants to see their investment go in red numbers. But where most investors see red numbers as troubling and times of doubt, sound investors will see that Mr. Market is offering shares for bargain prices. And the same can be said the other way around. If everyone is buying, stocks might become overvalued. In this case Mr. Market is very confident about the future and makes you pay premium prices. In this case fundamental analysis is your friend.

That does not mean every premium priced stock is overpriced or every stock trading at low prices is a good buy. It’s just Mr. Market showing you prices based on his state of mind. And his mood swings can have low depths and even higher highs. It’s up to you to value Mr. Market whether he's right or wrong. He won’t tell you anything, he also does not care if you take his offer or not. He will be back with another offer the next day.

You are not trading against others (Mr. market), you are trading against yourself. The only way to protect yourself from Mr. Market is by doing in-depth analysis for all your trades or investments you’ll ever make. Only then you are sure you are making the right decision. That still does not mean every investment will turn out the way you anticipated or calculated. But the chances will definitely rise in your favor.

Key Concepts:

  • Nobody cares if you make profits or not, only you care.
  • The financial markets are full of parties which all have conflicting interests.
  • The biggest enemy you’ll face when investing are your emotions.
  • Reduce the impact of emotions to a minimum by having a solid investing plan based on data.
  • Mr. Market will show you offers each day, sometimes undervalued, sometimes overpriced. He does not care if you buy them or not. 
  • You are not trading against others (Mr. market), you are trading against yourself.
  • The only way to protect yourself from bad offers from Mr. Market is by doing in-depth analysis for all your trades and investments.
  • Investing is not without risk. Even the products with the lowest amount of risk can cost you money.

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