Editor’s note: Today’s offering comes from the nimble minds of my firm’s summer interns, Linda and Gautam, who I think captured well the spirit and intent of “Persuasion Time.”
In pursuit of certainty we often find that the fear of uncertainty drives our actions. These actions may not be beneficial but they probably feel safe. First year college students face the ever-present threat of not fitting in while retail investors wake up fearing a red negative sign at the bottom of their screen. Acting on these negative urges often results in hastily made decisions that may prove damaging in the long run. The recent market woes prompted us to recall our early days in college, however it is our positive experience thereafter that we hope will encourage long-term participation in the market.
In recent news, hearing and reading about a market that is quickly losing confidence is tough to avoid. When the Fed announced its plan to slow stimulus, investors realized interest rates were poised to rise and took this as a disconcerting sign, instead of realizing the Fed’s nod at a recovering economy. This announcement caused the markets to tumble almost 2.5% in one day. In addition, the recent news out of China only increased investors’ fear of the uncertainty this bodes for U.S. markets. This led to a three percent slide in the S&P500 over the past week. Akin to the recent market downturn due to global factors, fear of what new trouble tomorrow could bring instilled a negative attitude in us during our early days in college.
(Gautam) As a First Year student at the University, the prospect of finding a group of friends, my niche, was daunting at first. The activities fair seemed like a promising start, but I was met with hundreds of clubs and societies to explore, with no guarantee of an enjoyable experience. It would have been easy to gather my belongings and return to my dorm before even getting my feet wet – something I suspect many people will be doing this weekend at the beach. My increasingly negative sentiment towards not only my peers but also my University was substantiated on my perception of their college experience. It seemed as though everyone around me was “fitting in” – either loving their classes or loving their friends, whereas I felt neither. In order to avoid perpetual unhappiness or future regret of inaction, I chose to begin applying to other institutions to escape. Which in hindsight, was just like retail investors selling stocks when they go down…
(Linda) Arriving to the States as an international student from Switzerland to study at the University seemed extremely exciting at first. Although I had never visited the University, all the stories I had heard and pictures I had seen contributed to the high expectations I developed, but only became aware of after arriving. The first few weeks were thrilling with all the “newness” of being a “First Year.” While I thoroughly enjoyed my classes, I soon started to resent many other aspects of college life in the U.S. Being from Europe, I felt extremely restricted living on a campus far outside a city with limited availability of public transportation. Fellow students were met easily and initial friendships started fast. Nevertheless, in this foreign country without any family I was missing a true friend. Midway through my first semester I started applying to other colleges. I strongly felt that my unhappiness would only get worse and if I did not change something about my situation soon, I would regret my entire college experience. Again, displaying the “flight” response many retail investors feel at the first sign of market losses.
Both of our first year experiences prompted us to consider transferring to a different University. Scared by initial hardships, we doubted our future happiness and success at this institution.
(Gautam) In the wake of external factors influencing your short-run predictions, it is important to hold your ground and prepare for the long run. It has been two years since I decided not to submit my applications to transfer, and I can now say more good things about my University experience than bad. I have found a group of friends I know I can rely on, and my course of study is even more interesting and challenging than I could have ever imagined.
(Linda) In the end, I did not transfer. I was unhappy for almost my entire first year. I was scared of the future’s uncertainty, but decided to stick it out. After that one tough year, I started genuinely having an amazing time, found great friends and am now experiencing the unforgettable college life everyone has talked to me about before coming to the States.
The fear of uncertainty about the future seems to be an ever-present feeling for investors. Equity investing seems exciting when we start creating our first portfolio. We eagerly wait for stock prices to rise and make returns. Once the market shows signs of a downturn, however, fear takes hold of the investor and selling the stocks whose prices are rapidly falling seems like the only possibility in order to avoid great losses.
In the short run the market will always be volatile (downwards as well as upwards!). Trying to predict the market and timing short- term trends are characteristics of gambling. Given that all available information may be priced into stocks, it is extremely difficult to “outsmart the market”. If the investor stays in for the long run and does not sell equities as soon as the market struggles, attractive long-term returns can be expected. Sticking with one’s choices and not being scared off by negative developments is crucial not only for investing, but for life in general. Much like the long-term return our University provided, the stock market depicts a similar pattern. Negative shocks have rattled markets and investors for decades, however overtime a positive return has been the result. Stocks also outperform all other assets classes in the long run.