I have a friend I'll call Doug. In June he called me and demanded, "Why didn't you tell me about gold? It's at $700!"
I responded that I had mentioned gold and silver for years, but he hadn't been interested, so I had stopped talking about it. I gave him my opinion on precious metals, and why he should consider starting to buy. I even loaned him a copy of the Gold Rush 21 DVD set, so he could listen to other experts.
When the precious metals corrected sharply in June, I told Doug this was an even better time to buy. However, he had spent his extra money on his hobby instead.
So why didn't Doug buy precious metals? He's a bright guy, and well informed on a variety of topics. Evidence and intelligence aren't holding him back. I believe he's waiting to feel ready.
Deep down, humans are conservative. We are hesitant to jump into new situations. We like to wait until other people have tried it and had a good experience. How many times have you asked your friends for a recommendation on a mechanic, or realtor, or other professional instead of picking one at random? The more important an issue is to you, the less likely you'll try something new.
Few things in life are as important as your investments. Your decisions now could make the difference between a comfortable retirement, and working into your seventies. With the deluge of information in the media, it can be difficult to sort through it all. Many people find investing very confusing. They feel more comfortable following the lead of their financial advisor or investment guru. Besides, if everyone is doing the same thing, they can't all be wrong, can they?
We only have to go back a few years to the dot-com crash to find an example of millions of Americans making a grave mistake. Pundits in the media waved their New Economy pompoms as investors fell off the financial cliff. Later, they shook their heads and consoled themselves they were all wrong together. When the masses buy euphorically and push prices up to incredible levels, the end of the bubble is near.
Why were so many speculators so confident yet so wrong? The answer may be found in the structure of the brain itself. With complicated decisions like investing, different parts of the brain may be sending conflicting messages.
The limbic system controls emotion and motivation. It encourages us to go with our feelings. This is why many investors buy assets at a high price when it feels good. At the same time, they are getting positive reinforcement from others who are acting the same way.
The prefrontal cortex controls planning, adapting to new situations, and decision making. It's the logical part of our brains that allows us to analyze different options, and delay gratification.
However, if we let our limbic system push us into a rash decision, we may not want to admit we're wrong. It's even harder to abandon a plan once we've sunk time and money into it! Our prefrontal cortex may cooperate, developing reasons to justify our purchase. We often search for evidence that proves we are right, and tend to ignore facts that don't fit with our theory.
It's not that emotional decisions are necessarily bad. We all make them. We choose where to live or who to marry not on simply logical terms, but based on how we feel.
Our limbic system may keep us out of trouble, as well. It helps us pick up on a stranger's nonverbal communication. We sense they are not friendly even before we can verbalize why.
In addition to the limbic system, we are also influenced by the recency effect. We tend to focus on what strategy is working now, or what did in the recent past. It's difficult to pay attention to an entirely new asset class when we're focused on our current portfolio.
Unfortunately for human nature, investments tend to be cyclical. The best investors like Warren Buffett and Jim Rogers know that it's important to "buy low." That means you need to invest in assets that are fundamentally sound, but out of favor with the crowd. As James Dines states, those who are early "look wrong." This doesn't feel good at all.
I have to give many readers credit for recognizing precious metals as a superior investment, even while most of the media disparages them. These investors have chosen to focus on intrinsic value and fundamentals, while swimming against the tide of family, friends, and acquaintances who disagree with their decisions. However, they will look very smart in the long term.
We have been in a bull market for precious metals since the 2001 bottom, but we still have a long way to go. Silver would have to top $132, and gold would have to reach nearly $2100 to match the 1980 peak in 2006 dollars. At the same time, mine output is decreasing, and newly rich consumers in China and India are snapping up ounces.
Silver's supply picture is especially tight. After peaking near 130 million ounces in February, the COMEX warehouse stocks plummeted this month to 98.47 million ounces. That is the lowest level reached this decade.
It's your money, so you make the final decision on how to invest it. Do what you feel is right, but get the facts before committing your cash. Use your prefrontal cortex, and don't blindly follow any "expert," including me. Don't be swayed by fancy jargon or the hot stock tip at the cocktail party.
If you decide to buy precious metals, take your emotions out of investing as much as possible. Buy a consistent amount on a regular basis. If the metals correct, you get more. If they go up, you profit.
If you buy physical metal and avoid margin, you don't have to sit in front of the computer watching the price. You can enjoy the important things in life: friends, family, and a good night's sleep.
Copyright © 2006 Jennifer Barry
