It’s probably fair to say that many of us have ‘superstitions’ that govern our actions, at least on a superficial level and it was demonstrated in pigeons in the last century!
For example, this could be wearing a ‘lucky shirt’ on game day for those who play various sports or perhaps weddings, which are rife with all manner of superstitions and odd customs.
Most of us will likely follow these minor quirks while allowing ourselves a wry smile and acknowledging that it is silly but knowing you’re doing no harm by wearing your ‘lucky’ red socks to that afternoon’s cricket match.
But when it comes to our money and the markets, that is an entirely different ball game with very real stakes and NOT something to be governed by personal quirks!
It is interesting how many invest their money superstitiously rather than based on any fundamentals such as ‘value’, for example.
Understanding some of the psychology behind investing (and thus unhelpful traits we may develop) can prove invaluable lessons.
Of course, there is the other side to this – looking at funds or sectors which have done badly and buying them because they are likely to do well going forwards – and likewise selling the top performing funds and sectors because they are likely to do badly because today they are too dear.
Too many investors believe that the ‘present’ in terms of conditions will endure forever but of course they do not. However, complacency can mean they fail to take action when they should and indeed, if on the positive side, often they become ever more confident of their wonderfully clever abilities and their strategies, a very dangerous delusion.
Have you heard of BF Skinner’s ‘Superstition in the Pigeon’ article? It’s quite possible you haven’t, but in 1948 the renowned psychologist and behaviourist published on his work with pigeons.
In a nutshell he taught them learned behaviour such as spinning around, for which they were rewarded with food. Soon, his pigeons would practise this ‘superstition’ because they thought something good would come of it.
If you think this sounds similar to financial markets, you might be correct! Investors have their own superstitions about what leads to market success – some may connect market movement to events such as elections, or others become convinced the market always rallies on a particular day.
It does not help if others follow the same pattern, making it become (temporarily at least) a self-fulfilling prophecy. Even if a strategy does not work, people will often double-down on their behaviour, convinced it will work next time, because it has become ingrained – much like those pigeons!
The truth is the markets (collectives of human beings) operate independent of our personal beliefs and rituals, requiring clear and objective thinking and assessment too, not emotional or indeed irrational responses to trends or events.
You may have seen charts before of sectors which show, say, that in 2021 ‘Growth Capital’ was one of the top performers but the next year it was the worst.
On this basis, areas expecting a bounce of some magnitude now should include commercial property, renewable energy infrastructure and UK smaller companies after several years in the doldrums.
That resonates with us on ‘value’ grounds regardless – some tremendous value abounds there and with great natural incomes too – but then we aren’t superstitious.
