The Irrational Investor

It is correct to approach market timing with a positive attitude, as well as positive expectations. To feel confident that your strategy will not only be quite profitable, but will also protect you from the inevitable declines that always occur in the markets.

However, I am concerned that some market timers take an unrealistic approach.

Elevated Expectations

The unrealistic approach to market timing is to expect instant gratification. To have the expectation of immediate gains; that losses are not only "not" something to be expected, but also "not" to be tolerated.

Part of this is caused by unrealistic advertising promises by trading services in advertisements found all over the internet. But part is also caused by investors wanting to believe that easy money is there for the taking.

There is no easy money. Market timing works, but it takes time, commitment, patience, and the ability to stick to a strategy even when friends, TV commentators and news events are pressuring you to do the opposite.

Minimizing Unpleasant Consequences

Many new market timers approach the markets with a tendency to minimize the very real potential for unpleasant short-term consequences and to be overly optimistic.

Do you remember Yale economist Robert Schiller's book "Irrational Exuberance?" Published in the year 2000, it was widely criticized. At least it was until the bear market chopped 50% to 80% off the S&P and Nasdaq (and off many portfolios).

Apparently, lessons learned from history quickly disappear from the minds of Mr. Schiller's aptly described "irrational" investors. Many quickly forgot the harsh lessons of the bear market of 2000-2002.

Now of course investors are again aware of the potential for losses in the financial markets after watching 50% loped off stock values in only a year. But watch as the advance moves higher and you will see irrationality return.

"Irrational investors tend to underestimate the market. They are usually bullish and fail to recognize that the stock market can, and will, take away profits."

Long-term planning is unimportant to the irrational investor. Yet interestingly enough, market timing actually defines long term planning.

The setting in motion of a plan to grow your investments over time, and to protect them from losses, is the opposite of speculative trading.

We hope no FibTimer subscribers fall into the trap of having elevated and irrational expectations. Almost every week we write commentaries designed to help our subscribers know what to expect, so that they are prepared for whatever the market throws at us.

Market timers with elevated expectations will abandon a strategy after a small loss. As a result, they wind up locking in those losses without giving the timing strategies, which work quite well over time, a chance to perform.

Having expectations that are unlikely to be met is a sure fire way to making poor emotional decisions, always at the wrong times, and usually creating losses that should never have occurred.

Below is a list of several common irrational and overconfident traits.

Irrational Traits

Don't Be Swayed By Crowd Psychology

The "majority" of investors are the most bullish at market tops and the "majority" of investors are the most bearish at market bottoms. Just look at the huge spikes in trading volume during those times.

And remember, this is not just something that happens to the other person.

Each trader is absolutely sure of his or her position, and if they can talk you into following them, you will be one of the many tens of thousands who "buy at the top" or "sell at the bottom."

In short, don't be swayed by crowd psychology. It is often the very opposite of what you should be doing.

That is what market timing is designed to defeat. Market timing offers unemotional decisions, issued by a tested strategy, replacing emotional ones.

Lastly, understand that market timing does not mean market forecasting!

At Fibtimer we identify and trade trends. This is not forecasting and no crystal balls are used. We use time tested strategies that have profited for many many years in real-time trading and through two severe bear markets.

It has been said that "Nothing will stop the truly irrational investor." Hopefully that is not always true.