Multi-Unit Franchisee Magazine Issue III, 2012 | Page 78
InvestmentInsights
By Carol M. Schleif
Don’t Be a Yo-Yo!
Keep a cool head as economic indicators rise and fall
I
n my previous column I made several suggestions for successfully navigating our times to a brighter future. The
markets had been historically, mind-numbingly volatile all
year, taking the gyrations to record proportions. Frustration with the status quo among investors was high and concern
over volatile stock prices, developed country politics, and consumer and government debt levels dominated the media. What
a difference a couple of months can make! When the numbers
were tallied in early April, we had just finished the best first
quarter since 1998.
We need to stay calm because we’re not through yet.
True, the markets got off to a roaring start this year. Investors suddenly swung from nervous and
uber-conservative to seeking return—and
risk—in far-flung places and asset classes.
Emerging markets rallied, while blue-chip,
dividend-paying stocks languished. The
outflow in stock mutual funds staunched
somewhat as the indexes soared.
As reported by global consulting firm
McKinsey & Company, CEOs noticed.
In its March 2012 Economic Conditions
Snapshot, McKinsey found that more
than twice as many of the world’s CEOs
surveyed believe the economies are better now than six months ago—even in
Europe—and an even larger share expect they’ll be even better six months
from now.
From watching this survey for years,
I believe the trend is clear: Executive optimism or pessimism is more tied to stockmarket behavior than economic reality. For
example, when asked this question back
in June 2007, only 13.2 percent of CEOs thought their countries’ economies would be moderately to substantially worse in
six months.
separating emotion from decision-making.
A chart we’ve used with clients over the years visualizes the
yo-yo investing this tendency can produce if we let emotions run
rampant, illustrating how the market’s (or more accurately, the
economy’s) intrinsic value typically follows a steady upward path
over the long haul while sentiment goes up and down like a yo-yo.
We go from irrational exuberance to Chicken Little paranoia—
overshooting and undershooting. From cautious optimism, up
we go to excitement, thrill, and exuberance before plummeting
down to anxiety, denial, fear, desperation, panic, capitulation,
despondency, and depression. And back again. And again.
The cycle used to take years but occurred three or four times
last year alone. Global strategist James
Montier puts it best when he says, “Each
of the spikes in volatility occurred when
investors went from losing their minds
at the top of the market to losing their
nerve at the bottom.”
I believe the
trend is clear:
Executive
optimism or
pessimism is
more tied to
stock-market
behavior than
economic reality.
Yo-yo investing
This tendency to vacillate from fear to optimism and back again
is an age-old issue in the stock market. Since anything denominated in numbers is precise, accurate, and measurable, we’d like
to think participants’ behavior and results will be much more
rational and predictable, right? Our business schools still teach
theories that hold markets are efficient and investors make decisions only after thoughtful analysis of risk and potential return.
However, as we’ve noted so many times in this column, markets and businesses and politics and all sorts of institutions are
driven instead by humans, and we certainly have a tough time
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Multi-Unit Franchisee Is s ue III, 2012
Underlying problems remain
It’s fascinating how investors will overlook and rationalize away even legitimate
concerns during times of optimism and do
the opposite during rocky periods when
they willingly ignore obvious signs of real
growth, turnaround, and opportunity.
Fortunately, when we recognize our
yo-yo tendencies, we can circumvent this
process in our individual lives through
saner actions in our portfolios and our
401(k)s. After all, we’re the only creatures capable of putting a pause between a stimulus (“Stocks are going up,
everybody but me is making a killing!”)
and our typical response (“Gotta buy!”). Personally, I suspect
the current interlude may be one of those points in time where
pausing is very important. Why? Because the fundamental, underlying problems remain.
Yes, better stock prices alleviated the immediacy of some
of last year’s fears, but a robust equity market doesn’t change
the fact that most developed countries are still overloaded with
sovereign debt, unemployment is still painfully high, economic
growth is still sluggish and lackluster, and politics are still contentious. People have just chosen to forget those woes for a bit
and take an overly optimistic breather.
Did you notice that’s even represented this spring by retailers
trying to cash in on the mood? Bright colors are everywhere—
neon pink, green apple, firecracker orange, “pool” blue, and lemon
yellow—in everything from shoes to deck furniture!