The Dilemma of Investing in an Irrational World
In a perfect world, investing decisions would flow from a clear analysis of the prospects of a given investment making a profit for us. Notice I'm not saying that the investment itself will make a profit, but that the investment will provide a profit for us.
For example, if you perform fundamental analysis on a company, and find that a) the company is profitable, and b) the market has valued the shares of the company at a price significantly below what the company is really worth, you might conclude that investing your hard-earned dollars in said company might be a smart move. Alas, this may very well be a wrong conclusion. Just ask any experienced "value" investor about this rather reasonable model, and they'll explain that sometimes the shares of such good companies remain undervalued by the market for a very long time. They may even decline after you've invested in them. That's why professional value investors frequently have other criteria to help them make investment decisions in addition to the two reasonable criteria we mention above.
Which brings us to the dilemma of investing in what is essentially an irrational world. Yes, sadly for those of us who actually try to use our reason and common sense on a regular basis, we don't always get a "bang for our buck" when we do so. And it's not just in the world of investments; it's in the world PERIOD.
If you've ever presented your ideas to a group of people, where your ideas were thoroughly thought through, logically presented, and carefully explained, leaving no stone unturned, with references included to back up that which was not self-evident, putting aside your personal opinions and feelings in order to be as objective as humanly possible - and then had individuals in that group respond to your presentation with a comment that begins, "Well, what I think is," or perhaps "I feel that," you'll know what I mean by an "irrational" world. And, really, isn't that the way most people talk these days? They focus on what they think, or on what they feel. And there you are making every effort to be clear that your ideas aren't simply what you think, but that they're based on some effort to get to the facts, to the reality that stands behind your word.
Of course, the real problem here is that most people don't believe in any way that there is, indeed, any objective reality "out there" that's anything more than what they happen to see or think or feel. This is known as relativism, and is the root cause of so much of what's screwy with today's world. People who function in a world where everything is relative and there is no objective truth or morality - which is probably the majority of people out there, at least in the West - therefore have no trouble responding to reasoned arguments or to a well-researched and thought out presentation with, "I think," or "I feel," without any attempt to prove their points based on anything more than the fact the they think or feel a certain way.
Now, while all this may not be telling you exactly how you can or should invest in an irrational world, it does explain to you that a) the world is brimming with irrational people, b) many of these irrational people invest in markets, c) therefore you shouldn't be surprised when markets behave in irrational ways.
And to think we haven't even mentioned the traditional causes of irrationality in the markets: fear and greed. Heck, what's an investor to do?
For example, if you perform fundamental analysis on a company, and find that a) the company is profitable, and b) the market has valued the shares of the company at a price significantly below what the company is really worth, you might conclude that investing your hard-earned dollars in said company might be a smart move. Alas, this may very well be a wrong conclusion. Just ask any experienced "value" investor about this rather reasonable model, and they'll explain that sometimes the shares of such good companies remain undervalued by the market for a very long time. They may even decline after you've invested in them. That's why professional value investors frequently have other criteria to help them make investment decisions in addition to the two reasonable criteria we mention above.
Which brings us to the dilemma of investing in what is essentially an irrational world. Yes, sadly for those of us who actually try to use our reason and common sense on a regular basis, we don't always get a "bang for our buck" when we do so. And it's not just in the world of investments; it's in the world PERIOD.
If you've ever presented your ideas to a group of people, where your ideas were thoroughly thought through, logically presented, and carefully explained, leaving no stone unturned, with references included to back up that which was not self-evident, putting aside your personal opinions and feelings in order to be as objective as humanly possible - and then had individuals in that group respond to your presentation with a comment that begins, "Well, what I think is," or perhaps "I feel that," you'll know what I mean by an "irrational" world. And, really, isn't that the way most people talk these days? They focus on what they think, or on what they feel. And there you are making every effort to be clear that your ideas aren't simply what you think, but that they're based on some effort to get to the facts, to the reality that stands behind your word.
Of course, the real problem here is that most people don't believe in any way that there is, indeed, any objective reality "out there" that's anything more than what they happen to see or think or feel. This is known as relativism, and is the root cause of so much of what's screwy with today's world. People who function in a world where everything is relative and there is no objective truth or morality - which is probably the majority of people out there, at least in the West - therefore have no trouble responding to reasoned arguments or to a well-researched and thought out presentation with, "I think," or "I feel," without any attempt to prove their points based on anything more than the fact the they think or feel a certain way.
Now, while all this may not be telling you exactly how you can or should invest in an irrational world, it does explain to you that a) the world is brimming with irrational people, b) many of these irrational people invest in markets, c) therefore you shouldn't be surprised when markets behave in irrational ways.
And to think we haven't even mentioned the traditional causes of irrationality in the markets: fear and greed. Heck, what's an investor to do?
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