Posted by on Nov 12, 2016 in Articles & Advice, Blog, Columns, Featured |

Image Credit: This is clearly a foggy window, Pixabay

By Jason Zweig |  Nov. 9, 2016 12:43 pm ET

A time of political shock isn’t a time for investing action. Instead, it is a time to watch and wait. The worst possible moment to make clear and durable decisions is when you are surprised by what just happened.

Regardless of whom you supported for president, the results likely shocked you. Even if you expected Donald Trump to become the 45th President of the United States, you probably didn’t anticipate that Asian stock markets would drop more than 5% on the news. Or perhaps that futures in the Dow Jones Industrial Average would fall 700 points Tuesday night — only for the Dow to rally Wednesday morning.

And if your email inbox is anything like mine, it is filling up with messages bristling with such language as “scary,” “disruption,” “uncertainty,” “volatility,” “wildcard,” “wild ride,” “uncharted territory,” “serious economic crisis” and other alarming talk.

But the word you should be on guard against the most is “clearly,” as in “Secretary Clinton’s campaign was clearly in trouble” or “Mr. Trump was clearly going to dominate in the Rust Belt.”

The word “clearly” is the first reflex of prediction scoundrels pretending that they foresaw what would happen in order to cover up their abject failure to forecast what did happen.

Several consensus views on what investors should do are already emerging: Buy defense and infrastructure stocks on the expectation that Mr. Trump will boost spending; sell Mexico and other emerging markets; bet against the chance that the Federal Reserve raise interest rates in December, as the market had been expecting.

But don’t be fooled when market strategists and other pundits predict that President Trump is “clearly” going to do this or that.

Little is ever clear about an incoming president, and no more than usual — perhaps less — is clear about this one.

Surprise is processed in the human brain largely in a region called the anterior cingulate cortex. Much more so than in other animals, neurons there are highly specialized to match expected outcomes against actual results. This close tuning to the unexpected, and the ability to focus attention on it, are part of what sets us aside from other species — and gave humans a huge evolutionary advantage.

But that sensitivity to surprise, which served our ancestors so well in the struggle for survival on the African savanna, leads people today to leap to conclusions that often aren’t justifiable.

Surprise is disruptive and disorienting, forcing the mind to sort through contradictions in search of certainty — even a spurious certainty ungrounded in evidence.

As a result, the most extreme and confident opinions feel the most plausible and appealing. And the insidious word “clearly” makes you nod in agreement, creating the sense that you, too, have touched that comforting crystal ball that the pundit is holding.

In investing, what always matters is not what happens but how it differs from what people were expecting to happen. The best way to make the gods of financial history laugh is to say that anything is “clearly” going to happen.

President Obama “clearly” was going to impose health-care regulations, and so he did — but health-care stocks ended up resoundingly outperforming the rest of the stock market while he was in office.

President George W. Bush was “clearly” going to increase military spending, and so he did — but, according to FactSet, defense stocks lost 19% in 2001 and nearly 7% in 2002.

And President Franklin D. Roosevelt was “clearly” going to be bad for Wall Street. The day after the 1932 election, the Dow Jones Industrial Average sank 6.7% during trading hours and closed down 4.5%.

But then, between February and August 1933, the average stock rose 186%, with industrial and investment-related companies leading the way, according to financial historian Barrie Wigmore. “The financial markets,” he wrote, “had made up their minds that the Depression was over.”

They were wrong about that, too, of course, as the economy struggled for years to come and stocks took another 35% drubbing in 1937.

With the consensus in the wake of surprises so often wrong, the only sensible step for investors to take at a time like this is to do nothing.

As the Stoic philosopher and one-time slave Epictetus wrote more than 1,900 years ago, “Some things are up to us and some are not up to us.” If you embrace the idea of controlling only the things you can control, he wrote, then you must “try not to be carried away by appearance, since if you once gain time and delay you will control yourself more easily.”

Now more than ever, successful long-term investing is about self-control. The same punditocracy that predicted that Secretary Clinton would “clearly” win is no more likely, just one day later, to know what will “clearly” happen in the economy. What is indisputably clear is that the responsibility for self-control is in your own hands as an investor.

Source: The Wall Street Journal,

For further reading: 

The definition of “clearly” from The Devil’s Financial Dictionary:


Chapter Five, “Surprise,” in Your Money and Your Brain