“If every instinct you have is wrong, then the opposite would have to be right,” Jerry Seinfeld once mused to his friend, George Costanza, who was putting this thesis to the test.
After ordering the “complete opposite” of his usual lunch, George approached an attractive woman whom he would never have talked to on any other day.
Instead of a suave pickup line, he blurted out, “My name is George. I’m unemployed and I live with my parents.”
George landed a date, and doing “the opposite” ultimately got him a job with the New York Yankees.
Hilarious exchanges and amusing plots like these are what made Seinfeld one of the most popular sitcoms in history.
It was a show about nothing… and everything. So many viewers found it funny because it made light of our flaws and quirks, all the while resembling our everyday lives.
In reality, of course, our instincts don’t always turn out to be wrong.
However, we’re wrong often enough that Jerry’s observation resonates with us. And when it comes to matters of finance, people are seemingly wrong all of the time.
How many people bought houses during the housing bubble but wish they’d sold? How many liquidated their stocks during the depths of the credit crisis but wish they’d bought more stocks instead?
On a shorter-term timeframe, stock market volatility also increases the probability of being wrong. The stock market had its worst start to the year in history, and I’m sure the people who were buying in December 2015 wish they had sold stocks and raised cash.
Likewise, I’m sure the traders who sold the lows in the S&P 500 Index (SPX) on Wednesday wish they’d bought in order to profit from the 4%-plus rally into Friday’s close.
Indeed, with this year shaping up to be highly volatile, many investors will be wishing they’d done the opposite of most of their trades.
Here’s the paradox: If everyone were to buy low and sell high, then the levels/prices we see would never materialize. So, the opportunities to buy low and sell high would never have existed.
Thankfully, it’s not worth pondering this hypothetical scenario for very long. The financial markets are ultimately driven by human behavior, and that will never change.
Plan to Do the Opposite
It’s often said that when markets decline, there are more sellers than buyers. That’s not true, since every share sold is bought by someone.
Instead, when prices decline sharply, the sellers are simply more motivated than the buyers.
Planning is what separates the buyers from the sellers during emotional and chaotic times.
All else equal, investors should be more bullish now with the SPX around 1900 than they were when it was above 2100 mid-last year. Obviously, most investors aren’t and can’t be because they were ill-prepared for a selloff.
Now that we’re here, you should be asking yourself: What’s my plan of action?
Every bear market – including this nascent one – is punctuated by furious rallies. So, what will you do if the SPX rallies back above 1950? Will you be buying?
Rest assured that many of the same sellers over the past three weeks will be buyers at higher prices.
Conversely, oversold markets can and do crash. What will you do if the SPX falls another 10% in short order?
If you plan for uncertain outcomes, you’ll make the right decision when the time comes. Thus, you won’t have to channel your inner George Costanza and do the complete opposite of your instincts.
Safe (and high-yield) investing,
Alan Gula, CFA