Mr Worry or Mr Buffett?

Bruce Brammall, The West Australian, 18 July, 2022

I love when you can actually hear the cogs slowly turning and whirring in someone’s mind.

Then … click! The switch flicks on. Light is shed far and wide through the brain.

Sometimes, even down the phone line, you can hear the whirring, then the silence, and the click.

Psychology is a funny thing. The way people think and compartmentalise events in a certain way.

At times like now, when markets have been shaky for an period, it’s natural to get a little nervous about your nest egg. But sometimes those fears need a little psychology applied to them.

Mr Worry: “I’ve watched my super go down 10 per cent. And I think I should pull my money out.”

Mr Adviser: “And how about your investment property? The market looks to have peaked and experts are saying it’s likely to fall.”

Worry: “Yes, I know.”

Adviser: “Would you sell you property?”

Worry: “No! Property will bounce back.”

Silence.

The cogs start whirring. Then … click!

“Ah. Okay. I understand.”

Superannuation, even at Mr Worry’s age, is still a long-term game. Between the two of them, both healthy, the stats say at least one of them will likely be around for another two decades.

Markets will bounce back. They always do.

But it’s hard to get over some psychological barriers. And there are several going on right here.

In general, people are happy to buy when markets are rising and, bizarrely, seem happiest to buy when markets are (unknowingly) near a peak. But find it too hard to press “buy” when markets fall.

Similarly, some investors are too quick to sell winners, but stubbornly won’t sell dogs in their portfolio, hoping they’ll come good some day.

There has been enough written by academics to wrap the entire solar system in a bow. But it’s largely boring, turgid and a tough read.

And, in general, how wealthy, really, are academics?

So, let’s instead turn to the master, Warren Buffet. He’s not only a genius investor, but has also delivered the greatest one-liners on investment psychology and philosophy ever.

If you want to know how the best investor in the world reacts when things turn a little pear-shaped, then here’s a selection.

“Be fearful when others are greedy. Be greedy when others are fearful.”

“Whether we’re talking socks or stocks, I like to buy quality merchandise when it is marked down.”

“The best chance to deploy capital is when things are going down.”

“Our favourite holding period is forever.”

That’ll do. (If you want more, ask Doctor Google.) I think you get my point.

Market falls don’t bother the world’s greatest investor. Sure, psychologically, it hurts when it’s happening, but he sees it as an opportunity.

He profits when people panic. He considers selling (though I don’t think he does much of it) when other investors are high-fiving because markets are hot.

So, what is Warren Buffett thinking about the events so far in 2022? Dunno. I don’t have his phone number.

But, if you follow his “fear and greed” logic, the following is pretty clear.

If you were going to sell shares, you should have done so late last year, when greed was running rampant and markets had run stupendously. If you were going to sell property, probably earlier this year, in most Australian markets, for the same reason.

Sell now? I think Buffett would be saying that people are fearful, so he would be greedy. In other words, he’d probably buy now.

Is that what you, dear reader, should be doing? I don’t know your personal situation, so I’m not giving you advice. But, as a general rule, “buy quality merchandise when it is marked down”.

Have markets bottomed? Is it safe to go back in the water? I don’t know. But, personally, channelling Wazza, I’d be inclined to be a buyer rather than a seller right now.

Back to Mr Worry, who came back in to the office this week. There was not a single question, or sign of concern, about what markets were doing.

It was all longer-term thinking. Starting a pension income stream, moving out of the investment property and back into home, whether or not to buy an air-conditioner for the tenants.

When you’re feeling panicked, read something psychology-based to try to find out why sensible people sometimes want to do, and do, silly things.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial adviser and mortgage broker. E: bruce@brucebrammallfinancial.com.au.