• Tim Alford

Stepping Back from Cognitive Dissonance

The much talked about question in the financial markets is whether the kitchen sink support that’s being thrown out by governments is enough to counter the economic effect of the pandemic and hold markets up, and whether they have made a bottom and will return to a bull trend to new highs and beyond.


To me that’s an interesting question. I’m curious to see the outcome. What’s more important, however, and crystal clear to me, is what to do about it in terms of investing strategy. The risk/reward is so obviously asymmetric that the chance and payout of a virtuous outcome is miniscule relative to the obvious economic pounding and likely significant market route that is coming. In the recent past, I’ve suggested investors should reduce risk. Not any more. I’m now saying investors should be in all cash and defensive positions. It simply makes no sense to be otherwise.


Yes, the global economy could recover quickly to previous levels, and/or government stimulus could hold markets together to continue higher and never look back. If so, that is built on continued historically high (stupid) asset valuations and false stimulus, not virtuous economic and productivity growth. Historically, such a situation does not hold indefinitely. If this is some outlier, I’m ok missing it. I believe even in that unlikely case investment success better than “the market” can still be achieved by selecting favorable individual investments, even if not accomplished immediately. Being invested at current valuations with known upcoming tragic fundamentals completely lacks common sense. Sometimes one needs to step back and simplify to that level.


It’s so clear to me that I sometimes have a hard time understanding why so few take action. Inside I know the answer, but it still befuddles me. Investors have been so conditioned that they will just not deviate, even in the face of overwhelming evidence. I know the conditioning has been reinforced by markets that have always come back, but that doesn’t account for the counterfactual that investors may have done much better by exiting in times of extremely high valuations (1999 and 2006) and re-entering after market fallouts. This time the odds of a large fall and extended time to recovery are overwhelming.


The worst case is you don’t make any more money. You miss out. So what. FOMO is almost always wrong reason to do something. At a minimum, you keep what you have now.


The last thing I typically want to do in life is be told what to do or to tell someone what to do. I am in the business of giving investment advice, however, so in this case I urge anyone willing to listen to try and break this cognitive dissonance. The current market rally is an unbelievable second chance. I think those that don’t take it will look back and ask “what was I thinking” and “why didn’t I do that”. The problem is no one will know for sure it’s turns out to be the right course until 10+ years from now after markets don’t come back, which will be a painful period of waiting.

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