Fix It Friday - Overcoming the Wacky Economics of Investor Behavior

Disclaimer: [: 00:00:00

A copy of Fusion's current written disclosure brochure discussing our advisory [00:00:15] services and fees is available upon request or at www.fusionfamilywealth.com.

Uh, today I thought I would [: 00:00:30

I. I call it wacky economics because, uh, the, the way investors behave as it relates to [00:00:45] processing financial and economic inputs that relate to stock prices and buying and selling and so forth, is not just different than the way, uh, we behave with traditional economic inputs. It's actually the opposite of it.

nk it'll be very helpful for [: 00:01:00

Even though it's one of many behavioral biases or cultural biases as I like to call it. Uh, it, it, it, it can. In and of itself destroy, uh, plans.[00:01:30]

to illuminate and demystify [: 00:01:45

And now here's your host.

it is, is it, it it relates [: 00:02:15

And for the most [00:02:30] part, when it comes to economic, uh, economic behavior and processing inputs, we do re we actually behave pretty rationally, I wouldn't say perfectly rationally. So what I mean by that is we behave in a way that's known as, uh, counter-cyclically. [00:02:45] So what that means is the demand for goods and services is counter.

ally known as a sale, demand [: 00:03:00

[00:03:15] It's not countercyclical where we're. Our demand is the opposite of the price movement. It's actually pro-cyclical. Our demand moves in tandem with the price movement. So as the price of stocks is [00:03:30] increasing, going up and, and, and the more wildly it's going up, like in 1999 during the.com, uh, boom and, and ultimately bust, uh, our demand increases dramatically.

price of America online and [: 00:03:45

And that the risk of buying in at these higher prices was also somehow lower than the risk is would've been if we bought in at lower prices. Conversely. [00:04:15] When the price of great companies goes down and we have that sale, uh, investors, uh, tend to sell stocks. Uh, in fact, uh, one of the, uh, one of the greatest, um, [00:04:30] statements about it is attributed to Warren and Buffet.

n the stock prices are going [: 00:04:45

So, so reality isn't different than what human nature thinks in this regard. It's actually the opposite. Why do we behave that way? Well, one, one of the things that happens is, at least on the [00:05:15] downside when we sell, there's something called loss aversion bias. And what that relates to is the idea that the pain of a loss to us is felt two times more than the pleasure of an equivalent gain is felt pleasurable to us.

And at a [: 00:05:30

In fact, as I sit here recording this [00:06:00] episode today, after all of the hoopla related to the fears of the tariffs and potential recession and all of the nonsense that comes every day out of the media and the people with fancy titles from firms like Goldman Sachs and UBS, who profess to be [00:06:15] telling you what they know will be unfolding in the future, and they have no idea about it any more than you or I do.

we'll get there quickly, or [: 00:06:30

Regardless of how smart [00:06:45] or well educated, the person who's claiming to have the facts is they don't have any more facts about the future than you or I. So one of the things that causes us to react this way economically when it relates to stock prices. Also the way we think about [00:07:00] investing, we think about the stock market.

e try to teach them the same [: 00:07:15

And, and we don't buy that. That is just an [00:07:30] exchange, uh, mechanism to, to trade stocks. We buy great companies and great companies values actually go in the opposite direction as of stock prices. When stock prices are declining. If you can buy Apple [00:07:45] Computer or Coca-Cola at a 30% discount or a 20% discount a month ago because of the fears of the tariffs driving stock prices down 20%, we have to recognize that great companies, uh, look at that [00:08:00] opportunistically.

oblem is to come out better. [: 00:08:15

About a [00:08:30] month or so ago, it was a temporary decline in the price of their stock. And if you could buy it at that decline, uh, of 20%, your future investment is worth more. You're buying the future earnings of Apple or Coke and the future [00:08:45] assets at a discounted price. So there's an inverse relationship with the stock price declining and the value of the company that you're getting at that declining price.

rselves into believing that, [: 00:09:00

And if I don't buy at the bottom, that's okay. So I leave you with that thought. It's important also to be aware of what I call, and I term this phrase, [00:09:30] so you might not see it if you Google it, but market driven optimism, pessimism, bias. Everybody loved Nvidia two months ago. They wanted to buy it as much as they could.

lieve it or not, some people [: 00:09:45

And it might bounce back. Uh, it's, it's on its way, bouncing back as we speak today. Uh, but it's about 120. But the point is, is the same people who loved Nvidia at 180, uh, a lot of them were selling it at when it hit [00:10:15] 120 or 110 or a hundred at some level, that loss aversion bias, feeling the pain of the loss two times more than the pleasure of against gets them out of it.

its future prospects for the [: 00:10:30

It's market driven pessimism bias. We used to be optimistic about the company's [00:10:45] prospects didn't change. All that changes the price. Same thing works on the way up. A company we might not know anything about. Prices going up, everybody's talking about it. We start buying it and buying it like there's no tomorrow.

timism bias. We don't really [: 00:11:00

Try to have an investment plan, a date specific and dollar specific goal that you attach your investment portfolio to. You need more, as you saw in our last podcast, [00:11:30] sevens, which is stocks after inflation's, long-term return, then threes, bonds after inflation, long-term return. You need those no matter what the environment in front of you, uh, is doing.

t is doing today. And if you [: 00:11:45

Um. Podcast menus and also on our website, fusion family wealth.com.

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[: 00:13:00

To provide investment advisory services. A copy of Fusion's current written disclosure brochure discussing our advisory services and fees is [00:13:15] available upon request or www fusion family wealth com.