4/11/14 10:01 AM – In Time All Excesses Are Corrected

I am not a fan of the idea that market participants act rationally. An analysis of long-term market behavior does not bear that out at all. That idea was concocted in an academic setting far away from the day to day activity of the markets.

Yes, new information is quickly priced in, but market participants are not any more rational than people in general, and a good case could be made that when money is at stake they are less rational. Fear and greed play a big role in market decisions, even with institutions, though to a lesser extent than the man on the street. But no one who works on Wall St. can honestly say that fear and greed are absent there. It’s just not so.

Greed comes into play when things get hot and stocks are bought simply because they are going up a lot. That’s all some buyers need to know and that includes some institutions.

Fear comes into play when those same smoking stocks finally becomes targets of profit-taking and people start selling because the stocks are going down. That’s all some sellers need to know, including institutions.

So, the market tends to overshoot on both the upside and downside. Now, if you’re like my wife, who starts her Christmas shopping during the winter sales, or like myself who only buys suits in the spring and fall change of season sales or who gets a good deal on a convertible from a New England seller after a hard winter chill sets in, you like the idea of buying stocks when things are down and selling when things get too high. Of course, I have a human nature too, or so my wife tells me, and so I have to fight natural tendencies in order to pull that off in the stock market. It’s not easy.

If you won’t listen to me, listen to Warren Buffett and other long-time savvy investors. Warren Buffett was a buyer in the last big market meltdown, not a seller, and he made a lot of money once again.

The market is now correcting the excesses of 2013 through February 2014 and the highest fliers are falling like Icarus. Resist the temptation to buy them before they do a double bounce or until they stay down and take a while to get going back in the right direction.

The stock market has not had a decent-size correction since 2011 and is long overdue. Another 5% drop would take us down to the 200-day moving average. One of the early lessons I learned from an old hand was not to buy stocks when they are a long way above their long-term moving average because there will be a time when they sell at it or even under it.

Right now the turtles are looking good and the hares have panic in their eyes. Be patient, get your greed settled down and look for opportunities. If you’re a long-term investor in mutual funds, as in a 401(k) or IRA, resist the temptation to sell your funds. Hang in there and keep adding to your holdings. You’re buying more shares with the same amount of money now.