The Business of Selling Fear

To blunt, in financial markets it is easier to peddle fear than hope. Blame it on our lizard brain’s, but we are preprogrammed for survival. The same instincts and physiological responses that direct human’s fight or flight response are alive and well when dealing with financial stress. In times of market stress, these innate responses not only force our focus to become more myopic but also the loss aversion tendencies to become more acute. The same is also true for those who prey on these worries about what the future may hold.

Michael Batnick of The Irrelevant Investor, has a great article on why he loathes these “perma-bears”, or those who are always talking about the next financial crisis. As Batnick highlights, selling fear is easy as there are always circumstances in financial markets we don’t understand and any time there is an unknown, there is the chance for market turbulence. Whether its Quantitative Easing (QE), global currency devaluation, “faked” economic data, the Eurozone collapsing, the Bilderberg group, or the Loch Ness Monster, there are no shortage of narratives or individuals who are eager to sell you their wares to protect you from said events. The unfortunate problem of following the advice of someone who has predicted 8 of the past 2 bear markets is that you the investor, not the manager, suffers from diminished returns.

While there is nothing wrong with taking a cautious investment style, there are many problems with investing in a portfolio that only produces returns in one or two scenarios.  The best course is to work with someone seeks to understand your personal risk tolerance in order to develop an investment mandate commensurate with the goals you seek to achieve as well as the level of risk with which you are comfortable. Furthermore, it is important reevaluated the level of risk over time as circumstances change over your life. We at Pilotage do not have a crystal ball, but we do manage portfolios which produce a desirable outcome over a range of economic environments.

 

You can find Mr. Batnick’s article in entirety here: http://theirrelevantinvestor.tumblr.com/post/101419474783/selling-fear-as-we-make-new-all-time-highs-bear

 

As always we welcome your questions and comments at markets@pilotage.ch