I’m not trying to pick on Paul Farrell, really. He’s one of the most read columnists on Marketwatch. From time to time, however, I archive articles that are wildly optimistic or wildly pessimistic to demonstrate how difficult it is not to be carried away with emotion. This article just happened to fall into that category.
This particular article appeared August 17, 2010. The market had just gone through a near 20% decline, as well as the flash crash a few months before. Here is the front end of the article:
Yes, it’s going to get worse, a whole lot worse … Bill Gross warns this is the “New Normal. Forget 10% returns. Think 5%”. … Economist Larry Kotlikoff, author of The Coming Generational Storm, warns: “Let’s get real. The U.S. is bankrupt. Neither spending nor taxing will help the country pay its bills” … Economist Peter Morici warns: “Unemployment is stuck near 10%. Deflation coming. Stock market threatens collapse. The Federal Reserve and Barack Obama are out of bullets. Near zero federal funds rates, central bank purchases, a $1.6 trillion deficit have failed to revive the economy.” … Simon Johnson, co-author of 13 Bankers, warns: “We came close to another Great Depression, next time we may not be so lucky.” Why? Because Wall Street’s already well into the next bubble/bust cycle — the “doom cycle.”
The doom cycle sounds pretty bad and we are warned that things are going to get a whole lot worse. I’m not exaggerating. The whole paragraph was in heavy bold type.
Since then, we’ve gone through another 20% correction. And the market is more than 25% higher. Yes, higher.
Before you smirk and think you are immune from getting carried away, think again. We are all susceptible to emotion—it’s just part of our wiring. And it’s not just on the downside. It’s equally easy to get carried away with “new era” thinking on the upside.
Sentiment swings, I think, demonstrate one of the very best reasons to use a systematic investment process. Our happens to be an adaptive one driven by relative strength, but I’m sure other styles could also be successful. The important thing is to define a profitable process and then stick to it through thick and thin.
