Zweig Follow-Up Part I

Zweig addresses some very interesting points that are worthy of further discussion:

1. Zweig notes the connection between fear, panic, and the ability to make decisions. We are not talking about nervousness here but real psychological and physical stress. This is the moment where investors lose all decision making capability and any decision made is done to relieve the psychological and physical nature of the stress. Research tells us that decisions made under this type of stress are nearly universally wrong.

2. Decisions made under the above conditions can have a compounding effect which usually goes like this. An investor reaches a state of peak psychological and physical stress and decides to completely convert all investment holdings to cash. The immediate stress relief is enormous and mostly likely the decision will be rewarded in the short-term. Markets may continue to go down, reinforcing the wisdom of the decision and any rebound will take some amount of time, further validating the "right" decision. The compounding effect occurs in that such a decision brings with it an inability to "reengage" with the investment process. At some point in time the market will nearly always "recapture" the bail-out point and in this most recent case, move far beyond. The investor unwillingly now has two poor decisions to wrestle with psychologically, selling at the wrong time and failing to put any money to work at the best time.

3. I feel that one of the most important points I can discuss with you is what I believe is the single biggest mistake investors make and that is "extrapolation". Zweig somewhat touches on the concept when he mentions the emails about "the world coming to an end" crowd. Nearly all the major mistakes made by individual and professional investors alike result from "it is different this time" thinking. I would guess that 90% of the daily media coverage and most of the "Wall St. pundits" commentary revolves around extrapolation. Look no further than the last few years of market history:

Oil would never be low again and would trade near $200, $300, and even $500 per barrel.

Food and food commodities were in short supply and many were expecting food shortages world wide.

Real Estate would never correct. The demographics would continue to overwhelm supply for years to come.

All US banks were insolvent

The market would hit Dow 3000 and possibly lower.

Real Estate would now never bottom.

The economy would never recover and if so would plod along for years, maybe decades.

Luckily there always new "extrapolations around the corner. Currently:

Rampant inflation is 100% guaranteed

Unemployment will never recover

Each and every US consumer is dead regarding future consumption and in debt up to their eyeballs

Gold is going to $3000 or higher

The US dollar will continue to collapse probably past zero.

This is the great depression all over again.


And the beat goes on and on.