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.

We appre­ci­ate your kind refer­rals and the con­fi­dence they express. Please call or email us at any time to update your plan, let your emo­tions out, or just to say hi.