by David Stanowski
29 June 2007
A previous article on Investment Psychology explored the rigid and primitive thought processes, that force most investors to follow the herd, in order to feel comfortable. The first book to explore this phenomena, in depth, was Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, by Charles MacKay, that was published in 1841. (If you haven't read it, click the link for a free copy).
The Group Think that MacKay examined 166 years ago, is still alive and well and creating investment cycles today, as it has throughout history. The typical mood changes can be charted through the ups and downs of a full investment cycle.
This chart shows one way to plot this cycle. The shared emotions that were dominant in earlier phases of the real-estate bubble: optimism, excitement, thrill, and euphoria, are shown in the rising part of the cycle. Now that those have passed, the question is, what is the dominant mood, at this time?
Surprisingly, recent polls have found that 85% of U.S. homeowners believe that their house will rise in value over the next five years, and 63% believe that a house is a good investment, at the present time. This confirms the fact that we are still firmly entrenched in the denial stage, because whatever fear is out there, has not consciously taken hold, and become widespread, yet. We also appear to have a long way to go before desperation, and a bottom, are at hand!
This chart shows another way to represent this investment cycle.
I have been watching CNBC, and its predecessor, FNN, every day, for over twenty years. This network was set up to report on the stock market, but they do cover the other markets, too.
It has been amusing to watch their staff cover the stock market for more than two decades. They can't even masquerade as objective reporters, because they take on the role of unabashed cheerleaders for higher stock prices. This makes them spin every fact that they report in such a way to make it support the bullish case. CNBC would call the crash of October 1929 "a buying opportunity"!
At first glance, this reporting philosophy might appear to be harmless, because "everyone wants higher stock prices"; but this is not the case! How can a viewer get a sense of when prices are going to top and head lower, when that reality is disguised within the spin? The staff at CNBC also choose to do this, because they have a major conflict of interest. They know that when the stock market enters a bear phase, they lose viewers, and advertisers, and the station has layoffs!
For this reason, it was not surprising how they chose to cover the real estate bubble of 2002-2006. CNBC jumped on the bandwagon, and celebrated all of the excesses, even as they should have been warning that these were signs of a bubble approaching a top!
Now that the bubble has ended, and the real estate data has shown a falling market for several months, there has been very little opportunity for them to spin the data in such a way as to suggest the market will rise, in the near future. For this reason, they have found out, the hard way, that the herd needs the constant reinforcement that their investment decisions are correct, and when they don't get it, they turn on you!
It has been very amusing to see some of the comments that they are receiving on their real estate coverage. Many people are very angry at them for "being negative", and "causing the market to go down"! Of course, I understand what CNBC is dealing with. My articles are Contrarian by nature, so I receive both praise and thanks, as well as my share of complaints that they are too negative and depressing.
I believe that information is neither positive or negative, and that constantly acquiring data on your investments helps you make good decisions, as long as you can break away from the herd mentality. If an investor can receive accurate information, without the spin, it allows him to know when to sell his investments, near a top, and buy, near a bottom. If he is prepared to act on this information, how can this be negative, or depressing?
However, for those who believe that if they act, in consensus with millions of other investors, that their investment can only go up; any information presented to them of a contrary nature is viewed as heresy. It is an act worthy of scorn and punishment. It is time to shoot the messenger!
The next article will explore the ways that you can protect your real estate investments in a bear market.
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