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Tuesday, August 9, 2011

Where Are We on the Emotional Roller Coaster?

It won't be news for most investors in today's market, but emotions are a  major hurdle for investors.  And the data bears that out.  For example, Dalbar  , in their "Quantitative Analysis of Investor Behavior 2011," found that the average stock investor achieved an average annualized return of 3.83% versus the return on the S&P 500 of 9.14% through the end of 2010.  The underperformance is primarily due to investors piling in at market peaks and jumping ship at bottoms.  That is, they buy high and sell low - the opposite of what needs to be done to achieve solid performance.

So where are we on the roller coaster?  Let's take a look:

Source: investorbrain
Obviously we never know for sure, but it is crystal clear we aren't at the point of "Euphoria"( I hope that helps!).  We know that people are liquidating in a big way; and that awful, awful word "capitulation" is being bandied about with ever-increasing frequency.

It is reasonable to guess that we are moving towards the trough on the right hand side.  The obvious difficulty is that it is difficult to say how far down we'll go.  One thing that has been shown over and over is that trying to pinpoint the "Point of Maximum Financial Opportunity" is futile and, in fact, leads to missing the first couple of stages of the upturn, when it comes.

From the people I talk to and the commentary on CNBC on other channels, my guess is that we are between "Panic" and "Capitulation."

A fact to keep in mind, also, is that there are some superb companies that are becoming very reasonably priced in this debacle.


  1. I'd agree with your assessment.... somewhere between panic and capitulation.

  2. That's a very nice graph Robert - captures investor emotions quite accurately!

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