It’s unwise to be bored silly when investing in a bull market
• The need for excitement may lead overly confident investors to take unnecessary risks
Become “more humble as the market goes your way” — Bernard Baruch. It feels pretty good when things go your way in the markets. And it would be nice to assume that it’s due to your intelligence and your skills as an investor, but that’s unlikely to be the case in the wake of a bull market. It’s safer to assume that your success has little to do with you. Any other way of thinking could prove costly when the music stops playing.
Researchers have found that the brain activity of a cocaine addict who is expecting a fix is virtually the same as that of people who are expecting to make a successful financial gamble. The danger in allowing a bull market to increase your confidence as an investor is that it can lead you to take unnecessary risks or make silly mistakes in order to continue to get that high.
Bull markets can force investors to abandon a good process. The temptation to change your strategy when things are going well can be overwhelming if you don’t have the resolve to stay the course.
As value investor Ravi Varghese points out in his blog: “It’s exciting when assets go up or down by a lot. Generally, they don’t. It’s boring to watch things that don’t do much in a hurry. And it’s boring to wait for the market to validate your assessment of fundamental value … it’s boring to sift through financial statements [only to] discover a company is fairly valued.
“It’s boring to own a firm that has excellent prospects but that no one has heard of. It’s boring to remain invested in a company that is quietly compounding its value, when new opportunities appear more alluring.
“It’s boring to invest the same way you always have, when the world is full of ‘sophisticated’ investors raising money for complex strategies.”
The word boredom apparently came into vogue in 1852, when Charles Dickens wrote in Bleak House: “I am bored to death with it. Bored to death with this place … bored to death with myself.”
As an emotional state boredom dates back a lot further. Danish philosopher Søren Kierkegaard wrote in his book, Either/Or: A Fragment of Life: “Adam was bored alone; then Adam and Eve were bored together; then Adam and Eve and Cain and Abel were bored en famille. After that, the population of the world increased and the nations were bored en masse.”
Wikipedia defines boredom as an emotional or psychological state experienced when an individual is left without anything to do or feels that a day or period is dull or tedious.
Bertrand Russell wrote in The Conquest of Happiness: “We are less bored than our ancestors were, but we are more afraid of boredom. We have come to know, or rather to believe, that boredom is not part of the natural lot of man, but can be avoided by a sufficiently vigorous pursuit of excitement.”
When it comes to stock market investing that can have devastating consequences, especially for people who are easily bored. After all, what could be more exciting than trading in and out of the stock market? And, what could be more boring than never finding anything worth buying because everything seems to be fully priced, if not in fact overpriced?”
Which seems to pretty much the case in today’s markets.
Jason Zweig often warns of the dangers of being bored. “A bored investor is probably more likely to succumb to the whims of other bored investors moving in a herd,” he wrote in 2016. “All of this is true for professional as well as individual investors … it’s important to resist the pull of action for action’s sake.”
One of the hardest things for any investor to do is to stay true to a consistent process. That applies as much to a professional investor as anyone else.
In early 2000, near the peak of the dotcom bubble, George Soros and his hedge-fund team were preparing for the inevitable sell-off in technology stocks. Soros often warned his team that tech stocks were a bubble set to burst. In charge of the technology fund was Stanley Druckenmiller — one of the best-performing hedge fund managers of all time. In early March 2000, as the market soared further, Druckenmiller said: “I don’t like this market. I think we should probably lighten up.” A couple of weeks later, however, when the sell-off did start the funds were still loaded with hi-tech and biotech stocks. In a few days, Soros’s flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss. By the end of April, the Quantum Fund was down 22% from the start of the year, and the Quota Fund was down 32%. Druckenmiller later confessed: “It would have been nice to go out on top, but I overplayed my hand.”
In a subsequent interview he admitted having bought the top of the tech market in an “emotional fit” because he had two internal managers who were making about 5% a day and he just couldn’t stand missing out. “And so I put billions of dollars in within hours of the top. And, boy, did I get killed the next couple months.”
That’s not to say that “getting out” or “staying out” is necessarily always the best thing to do. On the contrary, if you’ve been able to hang on over the past few years you deserve a pat on the back. There’s no shortage of investors who went to cash a long time ago or who haven’t had the courage to buy since the financial crisis. The only takeaway here is that a prolonged bull market is a dangerous thing. The important thing is not to attribute the success that comes with a bull market to increased brain power.
The smart thing to do is to prepare for a wide range of outcomes that include the possibility of the market going higher, a slow sideways churn or a brutal correction. There’s something to be said for being comfortable with an investment strategy in any market environment.
Above all, it’s important to stay humble. While not always easy, humility may be one of the most useful traits you can develop as an investor during a bull market and to remind yourself that the good times won’t last forever and you’re not as intelligent as rising markets may make you feel.
IT’S BORING TO REMAIN INVESTED IN A COMPANY THAT IS QUIETLY COMPOUNDING ITS VALUE