The Financial Philosopher

Correcting the Correction

"Worry gives a small thing a big shadow." ~ Swedish proverb

The stock market has fallen more than 10% from its recent highs. By definition, this is considered a market correction.

As an investor and, more importantly, as a human being, the healthy perspective is to keep one's own negative sentiment in check--to separate oneself from the crowd--to focus more on the personal economy and less on the world economy--to remember that total well-being does not need to be completely dependent upon financial well-being.

You may need to correct the correction, if you will, in your mind.

From the financial perspective, it is important to reflect upon your own objectives for investments before forming any conclusions about market directions and especially before making hasty market timing moves.  For example, if your investment time horizon is 10 years, you should expect to see a 5 to 20% decline in stock prices several times over the course of that time horizon.

"A straight oar looks bent in the water. What matters is not merely that we see things but how we see them." ~ Michel de Montaigne

Market corrections may be considered a healthy aspect of a larger bull market trend; ebs and flows are natural in the course of economic and market cycles.  However, it is unlikely the investor herd will take this market over the cliff into a full-blown bear market trend, at least not quite yet. 

According the Wall Street Journal, the most recent Price/Earnings Ratio of the S&P 500 is 14.98, with forward estimates at 12.55.  In translation, stocks may be considered "fairly priced."  Of course, prices can always go lower but bear markets most often begin at higher, over-priced levels.

 "Worry is a thin stream of fear trickling through the mind. If encouraged, it cuts a channel into which all other thoughts are drained." ~ Arthur Somers Roche

Above all, the negative sentiment arising from distressed world economies and capital market declines need not be an eroding factor of your total well-being.  Money that is invested in securities, such as stocks, bonds and mutual funds, does not represent money needed for your livelihood in the present; it represents future financial security; it does not exist to support the basic physiological needs of food, shelter and clothing; and once those needs are met, there is no good reason for temporary financial setbacks to erode at other areas of well-being, such as emotional and spiritual.

In summary, worry over your finances can paradoxically harm your finances but it can also harm all other areas of your life.  When we experience financial market corrections, for the sake of your total well-being, it is important to go on living your life and to allow nature to take its course.  To end appropriately with Johann Wolfgang von Goethe: "Life is about life and not the result of life."

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Related: Mind vs. Brain Part II: Priorities, Pursuits & Productivity

The Bull's Third Leg (or Intuition & Little Old Ladies)

"Too keen an eye for pattern will find it anywhere." ~ T.L. Fine

One is ignored, two is a fluke, three is a pattern.  Once the pattern is recognized, it is drawn into reality.  Stock investors are wise to pay attention to this human (and flawed) heuristic attraction. 

Having been through the typical and dramatic post bear market  bounce (2009-2010), followed by a correction and slowing volatility (2010-2011), it seems all that remains is the third leg (2012-?) where speculators and amateurs drive stock prices higher only because "everything is going up."  By the way, there is no fourth leg...

Intuitively, I had already anticipated that the third and final leg in this bull market for stocks will begin this year.  I haven't been seeking to confirm these intuitive thoughts but I recently stumbled over this simple and illustrative MarketWatch article, Three stages of a bull market.  I'm not a technical trader but I believe charts, such as those presented in the article, can be more telling of human behavior (and eventuality) than that of fundamental analysis.

I also like to consider intuitive thoughts and anecdotal evidence.  Here's an example I use with clients: 

It was late 2005 and the sweet little old lady down the street greeted my wife and me as we were walking our dog.  She asked, "Are you going to buy one of those new condos?  People are buying them and selling them for quick profit." 

At the time, this trend of buying and quickly selling for profit was called "flipping."  My wife asked if we should try flipping a property.  My response was this: "When the little old lady down the street is doing it, the time to invest has passed."

Back to the present, the sweet little old lady no longer lives down the street but it is clear to me that there are more speculators and amatuers wading back into the waters of risk now than at any time since 2009.  I have recently spoken to prospective clients who were "not ready" to invest in stocks in 2009 but are now more comfortable with risk.  This is purely anecdotal but it is reflective of third-leg behavior and a caution:  Investors are presented with a double-edged sword where stocks may move significantly higher but volatility and an eventual onset of the next bear market is coming closer.

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Related: Quotes on the Unkown, the Uncertain and the Hidden

On Facebook & Fragmentation: A Tale of Two Realities

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only." ~ Charles Dickens

This passage from Dickens' A Tale of Two Cities aptly describes the paradox of modern technology, especially social media, which is increasingly defining (and dividing) modern culture:  With unprecedented amounts of tools to create our own reality, humans have equal capacity to either use the information as a tool to increase quality of life or to be perpetually distracted and fragmented so thinly that life fades quietly into a false reality that is increasingly reliant upon the comfort and convenience of illusion.

All of one's biases and preconceived notions can be shaped by "Liking" only people and sources of information that agree with one's egocentric views of the world.  We create our own radio stations or subscribe to those only with music that we already know; We subscribe to news feeds that only agree with our political, religious and financial positions.

"You are where your attention takes you.  In fact, you are your attention.  If your attention is fragmented, you are fragmented..." ~ Deepak Chopra

The paradox of social media is that it's ability to bring millions of people together is the same cause of dividing people into smaller groups; the greatest unifying force of human kind today is a cause of its fragmentation.  We consume information but we don't pause to think of what it is that information consumes.  It consumes our attention; and if our attention is consumed, our mind--our reality--is fragmented.

People no longer belong to physical communities; they belong to cyber-tribes.  What once defined culture has been broken into millions of pieces.  For example, personal music stations are self-created on websites, such as Pandora, so there is little chance for those without self-awareness to discover musical genres and artists that stretch beyond one's personal taste--there are no surprises and there are few opportunities to move beyond the boundaries we create for ourselves.

Self-created reality is attractive but if you want to grow as a human and if you want to open your mind to all possibilities, you will adopt the scientific method that says, "Prove yourself wrong."  This is difficult to do in a world that provides limitless means to prove yourself right without even thinking for yourself.

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Related: Beware of Confirmation Bias