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Weekend reading: Big opportunities come around like clockwork

Weekend reading

Todays’s blog of the week post comes from Tim of the ever erudite Psy-Fi blog.

Guest posting at Simoleon Sense, Tim (Richards, as we now discover) gives a whirlwind tour of behavioral investing and inefficient markets.

He points out that contrary to the nomenclature, the buying opportunity of a lifetime is a poorly named cliche – unless investing is to be dominated by ten-year olds.

From the Great Crash to World War 2 to the oil crisis in the 1970s to Black Monday in 1987, massive market dislocations actually seem to come around every ten years.

Of course, as we saw last March, when the market does slump most of the bears who were waiting to buy are too scared to go near shares.

They start believing the bad news stories, instead of trusting the valuation metrics they put forward when they called the market overvalued. They don’t have the mental equipment to trade profitably, which is why investing in a tracker month in, month out, is a better solution for nearly everyone.

Tim admits there’s no easy answers, but therein lies the opportunity:

What psychology tells us is that life and markets are unpredictable – which may be uncomfortable for people who want to see certainty in an equation but is nonetheless a truth that needs to be universally acknowledged.

Still, the securities industry is attempting to co-opt behavioral finance to its own ends. Quantitative models being developed along behavioral lines and work on neuroeconomics is attempting to pull economic behaviour out of our brains. There are even a range of behavioral funds which supposedly use behavioral psychology.

For people willing to take the time and effort to get to grips with behavioral finance in the markets this is terrifically good news because, as it stands, it’s impossible to see how the real lessons of psychology in the markets can ever be mastered in this manner.

So the opportunities generated from time to time by mass market delusions or crazy industry trends won’t go away.

You can read the whole post at Simoleon Sense. (For a reminder of how wrong markets can go, read my post on the myriad strange anomalies we saw back in December 2008. Negative Treasury yields, anyone?)

More from the personal finance blogs

Money and finance articles from the big boys

  • David Dreman: Surviving inflation – Forbes
  • Marc Faber warning of 10-20% Treasury yields – CNBC
  • QE knocked 1% off gilt yields – The Telegraph
  • Lost, apocalyptic last letter from Sir John Templeton – NewsMax
  • Four iPhone apps for house buyers – FT
  • Flaws in the UK’s new National Employment Savings Trust – FT
  • Investing in VCTs – FT
  • What the UK budget could mean for you – The Independent
  • How many shares in a trading portfolio? – The Motley Fool
  • UK government could soon sell banks at a profit – The Telegraph

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{ 4 comments… add one }
  • 1 Terry March 20, 2010, 9:05 pm

    “…unless investing is to be dominated by two-years-olds.”

    Or the E-Trade baby.

  • 2 Faustus March 21, 2010, 7:56 pm

    Good remarks about the hype surrounding golden buying opportunities. Hindsight is a wonderful thing. What inflates this language is the way the financial media now regularly take March 09 as a starting point for sensationalist reasons, building up the sense of investors having missed their golden chance. What of course many forget is that most people were holding stock before Mar 09 and had to watch it sink and sink before that point; many were still holding the same stock afterwards, so these troughs were meaningless for them.

    All that ultimately matters for the investor is the price one bought at, and the price one sells at – no point troubling oneself about all the froth in between.

  • 3 pkora March 22, 2010, 7:01 am

    Just interested in your view on japan being the buying oppurtunity for the next decade as a value play. Hopefully the yen does not fall too much against sterling to dampen any returns as i believe the japanese government is getting in to looose monetary policies like the rest of the world.

  • 4 Samurai March 25, 2010, 7:09 am

    Mate, big opportunities always come around, you’re right. This is also a good reason why to have A BOAT LOAD of cash sitting on the sidelines when that opportunity arises.

    BTW, how’s the health care system in the UK like? Pretty good?
    .-= Samurai on: The Mental To Physical Connection For A Healthier Lifestyle =-.

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