A phobia is defined as an extreme or irrational fear. I Googled phobias. There is a fear of money officially called chrematophobia, but no official fear of stocks so I will just refer to it as stock-phobia. Why are so many individuals afraid to invest in stocks when they represent one of the best wealth creation vehicles available? The fear of stocks is highlighted by a couple of recent headlines. One was titled, “There’s no such thing as a low risk way to invest in stocks,” and another, “The great bull market is dead.” Generally I view such headlines as a contrary indicator.
Why do people fear stock investing so much? I think the root cause is the general misperception that volatility is synonymous with risk. I contend that these are two very separate and distinct entities. Risk is the probability of losing money via a company going bankrupt. Volatility describes the ups and downs of that market, having very little to do with the fundamentals of the individual companies in the market. While there are many risky, speculative stocks that are best avoided, the market itself is very safe. A well-structured portfolio of stable companies is particularly safe.
I have come to the conclusion that the real risk resides in oneself. It resides in one’s reaction to volatility. If you can control the risk, that is control yourself, you can do extremely well in the market. A more detailed explanation of risk and volatility is in Chapter 28 of my book.
I have good company in my thinking. According to Warren Buffett, “Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments — far riskier investments — than widely-diversified stock portfolios that are bought over time… That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.” (From an article written by Dhirendra Kumar, April 28, 2016).
Why do headlines focus on the fear side of the issue? Why do political parties focus on the disaster that will befall if we elect their opponent, rather than the good they will do? Why do consumers get duped into buying expensive extended warranties? Why are fear-based marketing and fearful, sensational headlines so prevalent?
I think it is because fear is easier to market than facts. Never has agriculture supplied such high-quality food at such low prices, in such an environmentally sustainable manner. Yet we remain mired in a 20-year fear-based debate around GMO’s. Large commercial interests selling “organic food” are often behind the fear-based marketing campaigns. By the way, all food is organic. I don’t have much interest in eating in-organic dirt! Are there negatives? Sure, as with all things there are both negatives and positives. It just seems that we are in an era where the negatives are given significantly more credence than the positives.
Why do headlines focus on the negative and sensationalism? Simply, they garner more readers. Which headline will get greater attention? “The market plunged five per cent today as investors stampeded for cover,” or “The market declined by five per cent today which is a fairly normal occurrence?”
On September 30 I did a quick calculation of the “Titanium Strength Portfolio” outlined in the May 15 issue. The value was $59,759, or up 3.9 percent in the 4.5 months. I will do a more thorough update in January.
When investing (as with many things), it is best to ignore the fear based negativity and overcome your own stock-phobia.