I have a confession to make. I’m feeling nostalgic for last year’s stock market mayhem.
I miss the bad old days — and I’m not the only one:
The financial media has been saturated with stories marking the one year anniversary of the demise of Lehman Brothers.
The BBC’s The Love of Money series culminated with the Bank of England’s Mervyn King admitting that two massive UK bank failures last year almost killed the UK financial system. The BBC also ran a TV drama called The Last Days of Lehman.
Bloomberg tried to repeat the trick yesterday by reminiscing about the 700-point, one-day drop in the Dow a year to the day.
Innumerable blogs run by gold bugs, conspiracy theorists and market cranks abound. They predict and desperately hope for a new crash to bring back the good (i.e. bad) times.
Of course, like school and hangovers, I realise it felt a lot worse at the time.
Yesterday’s dip in the stock market was seized upon as the start of the correction everyone expects after the crazy advance of the past six months.
Yet today the market has bounced back.
This has been going on for months now. It’s the classic ‘climbing a wall of worry’ thinking of a battered generation of investors who have been recently reminded that investing in stocks is not a one-way bet.
I can’t remember ever seeing as many bearish investors about. If you go down to the woods today, the surprise would be how hard it is to get a space at the picnic.
For example, the only traffic keeping once-thriving share bulletin boards alive are posts outlining in great detail how terrible the economic outlook is — six months after the economic outlook started turning positive.
Of course, the stock market will dip again at some point. For all I know we’re in a bear market rally, and a 50% lurch lies just around the corner.
This is a guest post from Tim, author of the Psy-Fi blog, an excellent take on psychology and finance.
Behavioural finance – the study of where psychology meets finance and a car crash ensues – is now accepted as revealing how people mismanage their investments.
The behavioural finance approach offers a very different view of the world to old-fashioned efficient market theories, which reckoned that all stock prices were correct and based on rational thinking by rational investors in a rational world.
No one who’s experienced the last decade of turmoil can really believe that markets are efficient!
On the other hand, efficient market theories have the great benefit that they can be used to create so-called quantitative models. These models work for most of the time while people behave roughly rationally, and so enable investment firms to make decent amounts of money.
Unfortunately they’re also completely useless when everything goes wrong.
