The 10 Things We Fear in Markets

The 10 Things We Fear in Markets
They all have one thing in common — they are beyond our control.
Bloomberg, October 31, 2016 

Have a look around the web — even when it isn’t Halloween — and you will see headlines that seem to be designed to frighten investors:

“These are the Scariest Charts…”

“3 Reasons Everyone Is Spooked…”

“Fright Night at the Stock Market”

“Inflation Fear Fuels Bond Rout”

“Fear and uncertainty in cattle markets”

These click-bait headlines should be little more than a distraction to investors.

But they lead us to an important aspect of markets: What do investors fear — and more properly, what should they fear? Let’s look at some of the more common fears that now haunt Wall Street traders. Here is my top 10 list:

No. 1  A (fill in the blank) administration: Someone is going to win this election, and whoever that person is will be disliked by about half of the country. So what? It won’t matter to your portfolio unless and until that person makes a horrible mistake, like an expensive, protracted, unnecessary war.

It bears repeating: If you allow your politics to interfere with your investing, you are likely to be disappointed by both.

No. 2  FOMO: Fear of Missing Out, originally a millennial meme, often stoked by social media, that somewhere someone was having more fun than you. It has since morphed into the portfolio manager’s concern that there is a sector, asset class, investment, that they are underexposed to that is going to be this year’s big winner. Long treasuries (until a few weeks ago), junior gold miners, emerging markets, housing, short volatility, REITs to name just a few investments that lots of managers seemed to miss.

No. 3  Underperformance: This is the big one. Trillions of dollars are invested based on the promise of outperformance, and billions of dollars in fees ride on the investing outcome.

The simple truth is that most traders and investors won’t outperform their benchmarks over the long haul. The few who do well deserve their outsized compensation. Unsuccessful alpha chasers should be preparing themselves for what inevitably will happen in a transparent meritocracy.

No. 4: Recession. A recession is coming! A recession is coming! Economies are cyclical, so of course a recession is coming — there is always a recession coming. Here is a clever idea: Just stop worrying about it.

No. 5: A less accommodative Fed/higher interest rates. Gradual rate increases, especially from very low rates during a period of subdued inflation, haven’t proven to be a negative for equity prices in the past.

On the fixed income side, you knew this was coming for years — if you are not yet ready for a rising rate environment, who else do you have to blame but yourself?

No. 6: China. Has been collapsing for several years now. Wake me when it finally falls.

No. 7: Earnings. Another perennial “Boo!” Earnings have been increasing, albeit at a modest rate this year. A few quarters of softness have been attributed in part to energy prices. Draw a line in the sand for where you believe earnings are actually reflective of a significant downturn. That’s where you should become concerned.

No. 8: Career risk. Legendary stock-picker Bill Miller’s observation that many active fund managers are actually just closet indexers is worth thinking about. He says that expensive actively managed funds that have consistently failed to beat the market are a big reason for the move to passive investing. How productive is it to save your job today but kill your own industry tomorrow?

No. 9: Hyperinflation. Stop. Please, just give it up.

No. 10: The unknown. You must admit this to yourself: The future is inherently unknown and unknowable. And while we’re at it, stop blaming “uncertainty.” What you are actually describing when you reference unknowns is the nature of risk. Future outcomes are unknown, and that’s why you get compensated for embracing them. Relax, and learn to appreciate the thrill of finding out what happens next.

The unifying thread across all 10 of these issues is that we have precisely zero control over any of them. You can place bets one way or another, but the outcome is beyond your influence.

What you can control is your own behavior, and how you respond to events. What is true whether you are a portfolio manager or a trader — your reaction to events matters much more than the event itself.

Stop fearing events that are outside of your own control. Start paying more attention to your own behavior.

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I originally published this at Bloomberg, October 31, 2016 . All of my Bloomberg columns can be found here and here.