FOOL ON THE HILL-
OJ--may be this explains why I stay always invested---market giveth market taketh is my approach..gg
FOOL ON THE HILL
An Investment Opinion
by Alex Schay
Market Jam
"Yeah, I hear it's backed up all da' way to the end of the turnpike. Could you move your car back so I can get off?"
Despite the fact that the pony-tailed guy with the tattoo pronounced turnpike more like "torn-pike" and off like "uoff," I was giving the request some serious thought. We had been sitting, engines idling, on a Southbound stretch of the New Jersey Turnpike for the better part of five minutes. Already, cursing, bellicose drivers were backing up the emergency lane and tearing up dirt along the side of the highway to get to the exit that was immediately to my right. The same exit that I was now eyeing like my last salvation.
Now, the question I asked myself was, "Which course of action would put me in a position of succumbing to the herd instinct?" Following the growing stream of drivers who were heading off the turnpike and making me feel like a sucker for waiting around, or staying ensconced in a sea of shiny metal bodies, secure and docile like the rest of the herd. The counterintuitive answer is that the Chevy Blazer churning up turf next to me trying to get to the exit was the "smart money," trying to get quickly out of the market... er, highway... and shift assets elsewhere... um, get home faster. Now that I've let the analogy slip and reminded readers of that horrid song about life being like a highway, please indulge me for a second, I promise not to "ride it all night long."
You see, at the time, all the pressure was building for people to get off the turnpike -- or at least those who could. All the people sitting in the middle lane between exits just cranked up the music and hung their legs out the window, unaware of the agonizing decision-making that was taking place nearby. Doomsday rumors were swirling around among the groups of people that got out of their cars to survey the scene. This was the mother of all traffic jams, and I was informed that the entire 42 mile expanse to Delaware was backed up, bumper to bumper. OK, I thought, let's use some common sense and scan the available public information. First, I craned my neck while standing on top of my car to survey the scene. It looked pretty ugly -- nothing but red lights as far as the eye could see. Now, hang on, if the turnpike was really backed up for 42 miles, wouldn't people start getting off on every available exit? Hence, unclogging some of the congestion.
Regardless of the relative merits of that reasoning, I concluded that the 42 miles of pain had to be the product of some convenience store owner nearby, desperate for some business. I've been in some pretty bad traffic jams, but they usually occurred as a result of some chemical spill or unusually bad accident. Accident, that's it! What's the New Jersey Turnpike Authority saying about all this? Tuning into the crackling recording yielded some interesting information. It turns out that "the Authority" was advising people to avoid delays by getting off at the exit immediately after the one right next to me (which as it turns out ended up causing the traffic jam). Well to make a long story short, traffic started moving again about five minutes after I decided to get off the road. (I actually stayed perched on an overpass looking for signs of life on the highway down below.) The funny thing is, traffic never so much as slowed down again for the entire ride home. What's the moral of the story? Even with the occasional traffic jam, the going is still better on the main highway than on the side roads. Stay invested and keep the rubber to the road.
The past couple days of market turmoil reminded me of this incident, as well as the fact that we (as humans) simply aren't wired for risk assessment and evaluating the potential returns on financial assets (yet). It definitely goes against our nature. As Michael Mauboussin reports in his "Frontiers of Finance" series for CS First Boston, the human mind has only been ruminating over modern finance theory for about 40 years. In the grand evolutionary scheme of things, that's not even a drop in the bucket. Let's assume it's now the "midnight" in our development as a species.
Time Line of Homo Sapiens
Event When (Yrs. Ago) Time of Day
Homo sapiens appear 2,000,000 12:00 A.M.
Mitochondrial Eve 180,000 9:50 P.M.
Domesticated homo sap. 20,000 11:46 P.M.
Hindu/Arabic numbering 800 11:59:25 P.M.
Modern Finance Theory 40 11:59:58 P.M.
Mauboussin then queries, "What have you learned in the past two seconds?" From an evolutionary perspective we are trying to deal with a relatively new set of problems, like the expected return on an asset, while our cognitive make-up is using old tools to help out. Tools that tell us to get the hell out of the way when there's danger or to follow others of our species that are fleeing in terror as the markets crash. While much of this is meant to be amusing, it can be enlightening to step back sometimes and see how our desire to be part of the crowd, general overconfidence, and need to categorize things (with the help of cause and effect) impacts our investment decisions.
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