"The difference between what the most and the least learned people know is inexpressibly trivial in relation to that which is unknown." ~ Albert Einstein
This is especially true with stock investors; and it explains why uncertainty can have such a negative impact on stock prices. Similarly, financial markets often turn positive when the economic picture becomes more clear, even if the picture is not attractive. This also explains why those who take risk, those who see opportunity in darkness, while others are not willing to do so, are often the most successful investors.
What brings to my mind the impact of uncertainty on stocks is this week's improving perception of Euro-zone countries, the most reviled of which are Portugal, Italy, Ireland, Greece & Spain (PIIGS). Stock prices reacted positively along with the removal of some uncertainty over Europe: The overall Euro area second quarter 2010 GDP change from the previous quarter was 1.0%, according to The Economist with all countries, with exception of Greece, advancing. Germany advanced 2.0% for the second quarter, and 3.7% from one year ago.
The icing on the European positivity cake came this week when Ireland's government bond auction went quite well while broader sentiment improves toward Europe.
The US stock market reacted quite positively to this improved perception of Europe, as recent and significant uncertainty diminished (for the moment).
"Because your brain uses information from the areas around the blind spot to make a reasonable guess about what the blind spot would see if only it weren't blind, and then your brain fills in the scene with this information. That's right, it invents things, creates things, makes stuff up! It doesn't consult you about this, doesn't seek your approval. It just makes its best guess about the nature of the missing information and proceeds to fill in the scene..." ~ Daniel Gilbert
Uncertainty still abounds, especially in US housing markets; however, does this week's decrease in uncertainty justify higher stock prices? From a psychological perspective, the answer is yes, the removal of uncertainty does justify (or rationalize) higher stock prices.
Returning to my first remark, to the human imagination, an ugly picture in plain view is generally preferable to a dark room...
The world economic picture is ugly but the dark room is not as dark today as it was yesterday. This is largely a psychological assessment. The question that remains, therefore, for the individual investor is, "What remains in the dark room; and will I embrace the unknown as an opportunity or as a reason to stay out of the room?"
In other words, how much do you rely on intuition as an investor? How much of today's perception, positive or negative, is reality? Do you even care?
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