“It’s all Greek to me,” a client said, referring to the perilous financial condition of the birthplace of democracy. “I don’t see what that has to do with the price of my stocks. Most of them don’t do business there or even in Europe – the great majority of their earnings are from U.S. sales – and yet they have dropped.”
Perhaps we should have titled this column Beware of Greeks bearing debts or The Exponential Moving Average and the Nervous Investor, as they all have something in common.
An exponential moving average, sometimes called a weighted moving average, places more weight on the most recent price of a stock or index. The shorter the time used in calculating this type of moving average, the greater the weight given the most recent price.
So what does this have to do with the nervous investor? It’s the emphasis on the most recent price, or for many investors, the most recent good or bad investment experience. We hear it referred to often as “fighting the last war.” It is easy to do, as our most recent experiences, especially negative ones, are usually foremost in our mind: hence the heavy negative weighting of one’s thinking when looking at last year’s market and individual stock volatility.
No investor is going to forget the throes of 2008–09 and the falling off the cliff of damn near every type of liquid investment except Treasurys. It is not unusual to be nervous that it could happen again, but is the power of fear placing too much weight on the recent activity and not putting it in the context of the historic market and stock performance?
If one’s most recent investing experiences have been positive, the mental filters screen out the bad news, resulting in an overweighting of news that is perceived as good.
So it is in reverse, for those placing too much weight on their bad experiences of the bear market.
It is human nature that causes so many to fight the last war, preventing them from buying low and selling high. And human nature seldom changes.
Now back to Greece. The risk of a domino effect is real as far as the over-burdened countries of Greece, Portugal, Italy and Spain are concerned.
Suggested solutions to the current problems are many, with increasing stirrings about Greece being removed from the EU and having to face its crisis as an independent country.
By the time you read this the emergency may well be over, the negative perception abated, and the markets returned to less worrisome problems.
Even so, the recent losses suffered in the worldwide bear market will remain in the forefront of the minds of many investors, who will sell with near abandon on any hint of negative news, domestic or foreign. We trust you are not one of them.
Meanwhile, back in the U.S., the economic news is increasingly positive, with employment gradually picking up, interest rates remaining low.
Of course, headline risks still exist from the yet unexplained market sell-off on May 6 to the BP/Transocean oil well blowout and the Congressional badgering of Goldman Sachs. All are likely to continue to stay in the news for some time. Separate the wheat from the chaff, the noise from the substance, and don’t be rushed into any drastic investment decisions. Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company. He can be reached at firstname.lastname@example.org.