In 1973, I was honored with the Miss Walton County title.  As part of this honor, I competed in the Miss Georgia Pageant.  You may think a pageant consists merely of a single evening, but there was actually a week of competition and publicity included. 

As part of the publicity portion of the pageant, we were taken on a behind the scenes tour of Six Flags over Georgia.  I had been to Six Flags many times as a camp counselor and considered myself an old pro. 

Shortly after arriving at the park, we were allowed to ride a brand new, state-of-the-art rollercoaster.  They asked for volunteers for the front seat and I eagerly stepped forward.

I was smiling all the way up, but as we crested the top, I realized that the incline was so steep you could not see the tracks below.  It looked as if we were taking off into thin air.  My smile quickly changed to a scream, which may have been the only way I kept from passing out from fear. Obviously, I survived the rollercoaster and lived to tell the tale.  The experience changed my attitude toward volunteering without fully understanding the commitment.

So what does a real rollercoaster have to teach us about investing in a roller coaster market?  Here are my 3 big take a ways:

  1. Always measure the risk before you sit down for the ride.
  2. No matter how scary it gets, things eventually level out.
  3. Letting out your emotions helps you stay sane and on course.

Always measure the risk before you sit down for the ride.

If I had been a bit more humble that day at Six Flags, I could have either taken the time to look at the full ride or inquired about the steepness of the coaster before getting on board. 

We have this same opportunity in the market as we can measure the volatility we are likely to experience based on historical data and our asset allocation before investing.  As the speed of information increases, we have seen the frequency of high volatility increase in the overall market.  By looking at volatility before you invest, you can decide which financial path is right for you.

Eventually things even out.

By studying and understanding the steepness of the incline, you can predict the decline.  Eventually the ride ended and we were back on even ground.

All markets are based on supply and demand.  In the short term, the emotions of fear and optimism create extreme shifts in the supply and demand.  When large groups of people get fearful they often sell quickly, creating large supply without a corresponding demand. As a result, the price falls dramatically.

Fear takes us down; extreme fear takes us down faster.  Optimism works in reverse.  When we encounter something new, like a lowering of the United States credit rating, fear becomes extreme.   Eventually we adjust to the new information and reality.

Over the long term, markets are driven by earnings, cash flow, and economic fundamentals.  Ultimately, supply and demand is driven by economic value.  The sensible thing to do is ride out the volatility in the short term and anticipate the long term results based on the fundamentals of profits and cash flow.

Letting out your emotions helps you stay sane and on course.

When I found myself plunging down into the atmosphere at Six Flags over Georgia, I screamed without any prodding or concern about what I might look like.  I did not take any other action. I did not jump out of my seat, stop the coaster and get off or otherwise change my course; I simply let my emotions out.

The most recent Dalbar study of investor behavior looked amazingly like those of the past.  The average investor gains just a fraction of the market returns over a buy and hold strategy.

Warren Buffet always says it best:

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.

Let your emotions out and stay in your seat.

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