Faith in Assets is Fleeting

by Chris Wilson, www.CycleSpreads.com & www.CycleETF.com| November 1, 2008

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There is so much conflict between the inflation vs. deflation camp that most people fail to recognize the critical lesson, which is to guard against sentiment. Sentiment is the ultimate terminator of investment returns, regardless if your chosen poison is gold, stocks, or t-bills.

The degree to which people treat their chosen investment asset as a religion seems to be at an all-time high. This is reflected in reported shortages for some commodities, despite comparatively low prices. Likewise, the mass repatriation of dollars, despite the near zero return on cash instruments. Now religion may not be a bad thing, but religion when it comes to investment can be hazardous to humans. Human beings, particularly those who listen to and read investment sites, tend to believe what they read and hear. We think in terms of rewards, like the reward of being right or financial reward. The feeling of knowing we are correct in our assessment of any situation gives us great solace and comfort. The problem is that those feelings are not always corroborated by the facts. How many times have you been dead certain of something, only to be later proven wrong? And of those times, how many are followed by hindsight, where you reframe the situation to maintain your correctness? Alternatively, when you have been wrong and were penalized, did you accept your loss and slink away in defeat? It’s amazing how often we can be wrong about something, yet deny the mistake in order to maintain our core beliefs. I would argue that you should put aside these beliefs if you are to be successful in investing.

Some of us have core beliefs that are so ingrained in our psyches that make it impossible to recognize that near term events our diametrically opposed to those beliefs. Now the service my company offers does not speculate in gold, but I can tell you that we have a couple of customers who are incredibly eager to get out of what used to be their million dollar gold positions. They were certain, given what they were reading and hearing, that their dollar denominated assets were going to be worth less and less, while hard assets would skyrocket. All the facts were in front of them- high inflation and population demands coupled with decreasing resources meant that this time was different.

Where have we heard that before? We hear it every time! The world is a pendulum people- nothing is permanent. We want to be right, and we may be ‘right’ for a while, but ultimately the pendulum swings the other way. If your time horizon is long enough, you can simply ride out these periods and wait to be right again, if that’s what makes you happy. My response to that approach is that you will miss out on some great opportunities along the way had you kept your religion in your heart and out of your wallet.

A great read on a scientific approach to being right is Robert Burton’s “On Being Certain: Believing You Are Right Even When You’re Not”. The author examines the subconscious reasons we are so eager to be correct in our decisions, and to his assertions I would add that from an investment perspective, that I will be wrong some of the time. If you follow a system that has proven to be more reliable than not, even if it flies in the face of your fundamental beliefs, you can profit to a greater degree than your quasi-religion would have allowed.

Copyright © 2008 Chris Wilson
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Chris Wilson 847-370-1311 | Email | CycleSpreads.com | CycleETF.com

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