Heard in the Village: April 2010

Many villagers have been watching what is going on in Washington and Wall Street and they are a bit confused. They reviewed the Economic Governors (on the front page) and thought what Washington was doing to the economy would surely slow it and hurt Wall Street since it discounts the future. Some villagers said the markets will discount what Washington is doing later this year but not now because the current rally was set in motion because of the current economic recovery we are having and it isn’t finished yet. They said the market will deal with the events of today’s Washington in the next market cycle and not the current cycle.

Other villagers were discussing a chapter in The Little book of Behavioral Investing How Not to be Your Own Worst Enemy by James Montier that could explain the big declines and rallies that were coming in the next few years. The chapter first talked about predictable surprises that have “3 defining characteristics:
1. At least some people are aware of them.
2. The problem gets worse over time.
3. Eventually the problem explodes into a crisis, much to the shock of most.”

We can know that major events are coming but we still don’t when. What prevents us from knowing when?

There are at least 5 major psychological hurdles that hinder us:

1. Optimism-peple are blind to dangers coming.

2. The illusion of control. We think we can influence (or legislate or regulate) the outcome of uncontrollable events. Many try to quantify risk.

3. the self serving bias, a Washington favorite, where you interpret information and act in ways that support your own interests.

4. Myopia, a Wall Street favorite. You focus on the short term without thinking of the consequences later.

5. Inattentional blindness-you simply don’t see what you are NOT looking for even though it is staring right at you.

Most villagers were happy after the book discussion. They knew that forewarned was forearmed. They went home and reviewed their buy shopping list and plan and selling plans so they would be ready for the opportunities coming.

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