Invest as Wanda Buffett
It is Tuesday 30 October. The Bel20 is listed at 19.2% below its peak of 22 January. Popular Belgian shares such as Bekaert, Bpost, Balta and even Melexis are 40% to 60% cheaper, with Nyrstar more than 80% down. These corrections have not left a single investor unmoved. Feelings vary greatly, but what do you think? And one other question: are you male or female?
What should investors do with the fact that shares are 20% cheaper today on average than nine months ago? Any other person going to any other market would know exactly what to do: sniff out the discounted gems.
The stock market is a market like no other. It even sometimes verges on the bizarre: sales on the market are not attractive. On the contrary, the more expensive the commodity, the more buyers who are drawn to it. The cheaper a commodity is, the higher the scepticism and the greater the urge to sell. Many believe such a correction is a sign of a much more painful crash, such as the one seen in 2008 or in the months before October 1929.
Luckily, many experienced investors know what to do. They've been in this situation dozens of times – August 2015 or January 2016 are perfect for comparisons with the current situation. They know that it's a question of focus and trust. Whoever focuses on the economic damage that the American president could still cause through trade wars, a potentially disastrous hard Brexit, the Italian budget drama, the rise of intolerance or increasing barriers to free trade, will likely sell at the current rates. Those who realise that the geopolitical world is always full of uncertainty and prefer to focus on the strong operating results, continually low interest rates and extremely mild valuations on the stock market (particularly in Europe and the emerging markets), will likely continue to invest.
Furthermore, those who realise that the financial sector of today is generally in a far better place than during the major crises will surely keep their cool, too. A weak financial sector is always the worst-case scenario in times of crisis. As long as the financial sector remains outside the danger zone, the chances of a systemic crisis or a rush of panic sales and bankruptcies are small.
We are keeping our cool. We are firmly in the camp that does not believe the economic landscape will perish. As such, we are doing what we did before: focusing on individual companies with a bright long-term future (three to five years or more) and comparing their potential with their current market value. And what do we see? Our list of shares we think are worth buying has become significantly longer in the last two months.
So, we are on the buyers' side. Yet we leave our eagerness at the door. We buy in a calm and cautious manner, and above all, spread over time: a maximum of one package of shares a month, for example. We don't want to blow it all at once, because such a correction can last for months on end.
How long, though? We don't know, and no-one else does either. Only in extreme periods, in which the market is oversold (March 2009: buy!) or heavily overbought (summer 1999: sell!), does time play a role. Today, that is not the case. The valuations are not extreme, while positive and negative influential factors are more or less balancing each other out.
But what about the 20% drop?
In times of fluctuation look no further than Mr. Market, the allegory created by investor Ben Graham to give the psychology of investors a personality (and the title I used for my magazine). Mr. Market feels he is being plagued by Donald Trump's constant antics. Investors are herd animals, and when herd animals feel hunted, they run nervously from one side to the other – and a herd on the run can create some damage. That then results in losses of 20% or more.
Such herd behaviour is associated with intelligence. Mr. Market's brain is fed by substances such as testosterone and cortisol. Mrs. Market's brain, on the other hand, mainly contains the hormones oestrogen and oxytocin. The first two substances encourage trading, while the latter two encourage more thoughtfulness and collaboration. All too often, prudence is better than the urge to trade.
Testosterone, a uniquely male hormone, also has an effect on our self-confidence and increases our desire to take risks. Testosterone is also referred to as the 'winner's hormone', because it makes us believe we will also win the next match following a series of victories. It is no coincidence that athletes win in clusters: a short-term 'state of grace' in which they win the next match thanks to the increased self-confidence from winning the previous match.
Furthermore, men with high levels of testosterone are more optimistic than women. They seem more optimistic about themselves as a result of their belief that they can rectify a tricky situation. Such a conviction is lacking in most women.
The divide between men and women in terms of optimism is at its biggest on the stock market. A recent study showed that Mrs. Market, the female investor, sees higher risks than Mr. Market. As such, women invest less in shares than men. What's more, they also invest in a level-headed manner. They invest in what they know, are less active on the stock market and execute fewer transactions. All of this adds up to women achieving a higher stock market return than men, according to most studies.
The fact that Mr. Market scores lower than Mrs. Market may be down to the aforementioned hormone, testosterone. Such a testosterone-fuelled winning streak is good and indeed natural, but it won't last. High levels of testosterone in the long term also lead to high-risk behaviour. The inevitable first loss in a long time hurts then – and after a second loss and a drop in self-confidence often leads to a series of losses.
The other male hormone, cortisol (although women have it, too), increases fear during stressful periods. A cocktail of both suggests that after a long winning streak, Mr. Market will become impulsive and seek out risks. And if that starts to go wrong, he will begin to panic. That is what has been happening on the stock markets since the end of August: Mr. Market has been suffering from a crisis of self-confidence.
And what about Mrs. Market? She is much calmer about it all, given that women do not have high levels of testosterone. But Mrs. Market's role on the stock market is far more limited, insignificant even. The stock market is a male-dominated environment, and there are often still men who want to be seen as alpha males.
That's not to say that every man has high levels of testosterone and no female hormones. We all know men who, surprisingly, seem to invest like Mrs. Market: modest, cautious, thoughtful and patient. In this light, here's a reading tip: Warren Buffett Invests Like a Girl – And Why You Should, Too by Louann Lofton.
Pierre Huylenbroeck is the author of Onsterfelijk Beursadvies and Iedereen Belegger. He is also the publisher of Mister Market Magazine, a biweekly digital magazine for curious investors, with a portfolio that achieves an average annual return of 10 - 15% depending on the term. Feel free to download a free trial issue.
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