It's Never as Good or Bad as you Think

Remember last week, when it seemed like the financial world was facing enormous hurdles and markets were plunging worldwide? I was talking people off the ledge, attempting to calm frayed nerves and reminding folks that volatility breeds opportunity. What a difference a week makes. Yesterday, as I was leaving the office, an employee from a neighboring company said, “I guess everything’s better in the market now, huh?”

The swing between last Tuesday (January 22), when the Federal Reserve announced the massive 75 basis point (3/4 of a percentage point) cut and yesterday’s close can not be measured just in points gained in the Dow Jones Industrial Average, but in the roller coaster of emotions that ran through Wall St and Main St alike. People went from feeling terrible about the economy and the markets to considering that maybe the worst is over and January was just a bad dream. Maybe it is all over and we are about to start another bull run, or maybe the next shoe of the subprime crisis is about to drop, but either way, I can’t help but think about what my dad used to say: “it’s never as good or as bad as you think.”

That saying is a useful way to keep in check in almost any financial situation. For example, it probably would have been wise for the would-be Florida condo flipper in 2006 to remember that the massive gains in housing could not possibly continue forever. Similarly, last week when it felt like every stock was tanking, it would have been helpful to consider that the entire US economy was not falling apart—if fact, there are many industries that are doing quite well.

One of the biggest problems that investors have to guard against is that when people feel better, they tend to take more risk and as a result, often unwittingly buy at the worst possible time. As James Grant described it in the New York Times (Jan 27, 2008), “Profit-seeking people will take more financial risk when they believe the coast is clear. By taking bigger chances, however, they unwittingly make the world unsafe all over again.” Conversely, when people are nervous, they are unable to take the risk that maybe they should take, that is, buying low.

By reminding yourself that most of the time, things really are not as bad or as good as you think, you may be able to navigate markets (and the news cycle) with a bit more sanity and hopefully allow yourself to save or make more money. At the very least, you’ll probably sleep better.