Prompt from Barrons:
Most people have had the experience, at one time or another, of playing with the "house money" at a casino. You've won a few dollars gambling, and now you're feeling expansive with your winnings because, psychologically, it doesn't feel like it's your money to lose. It's house money.
Such thinking might be behind why the market seems so resilient over the past year, with investors ready to pounce whenever stocks retreat.
Scientific studies in behavioral finance and concepts like "prospect theory" are useful here, says Nicholas Colas , co-founder of DataTrek. The idea is that human psychology treats gains and losses very differently: A loss of $100 hurts much more than a gain of the same amount feels good.
This goes against much of classical economic thought, he adds, which assumes marginal gains and losses weigh equally on the human psyche and do not affect future decisions.
But they seem to, and it also is probably a good fit for the current market where investors buy any dip consistently, Colas adds. This second-longest bull market has effectively conditioned investors, most sitting on big gains, to bucket their "winnings" into "their money" and "house money." Forgotten are the awful bear markets of 2008-09 and 2000-02.
The literature suggests, Colas says, that people are more willing to take risks with house money, especially in small incremental bets, than their own money. Hence, if the market should dip a few percent, investors with big gains feel more secure in buying that dip. That is, they are betting with house money.
This pertains more to retail investors, but it clearly seeps over to professionals as well, he avers. Faith-based action is a lot easier to take when you are already sitting on a lot of gains.
Hence, with the market up about 40% over the past two years, the index hasn't dropped in a big way over that time. Low volatility plus steadily rising markets made that possible.
The psychology behind such behavior, Colas says, is that it's less scary to buy the dips because the investor is using "someone else's money," but that's not the case, of course. Once the money is in your pocket, it is yours, and all future decisions should resemble those made with your capital. But humans are funny that way.
What sort of market setback would shift investor perceptions back to "my money" from "house money"? In other words, would a 10% pullback spook the market enough to alter the "buy the dip" reflex loop, or do we need to see 20%? Or more?
Market bears will say we're overdue for another such journey, but the tape respectfully disagrees.
Absent a genuine and large-scale geopolitical shock that dents consumer confidence and sends stocks 10% lower over a week or less, "house money" rules will hold in 2018 for U.S. stocks, Colas says. Buying the dips dampens volatility and keeps prices rising. This will end at some point -- trees don't grow to the sky. But you don't want to bet against the "house" yet, he opines.
(END) Dow Jones Newswires 01-29-18 0836ET Copyright (c) 2018 Dow Jones & Company, Inc.
I suppose this confirms that people should try to keep emotions out of their investment strategy. What do you all think? In particular, do y'all feel different about margin than your own money?
Submitted January 29, 2018 at 08:52AM by mepcotterell http://ift.tt/2DICRLk
