Psychological Similarities Between Professional Darts & The Stockmarket
Is there a more psychological game than professional Darts? A game where just the one arrow out of a previous 100 can dramatically destroy any previous advantage you or your opponent may have had and turn the match completely on its head. The action in Darts is quick, relentless and the saying, slightly modified, of 'you're only as good as your next dart' is very apt.
Basically it doesn't matter so much what has happened in the past, what's happening right now is often far more critical.
So what does this all have to do with investing and the stockmarket?
Simple, the psychological aspect of Darts is very similar to that of the stockmarket. In the stockmarket the action can again be quick, relentless and perhaps more importantly previous market moves can often shrink into insignificance compared to what's happening right now. In effect weeks, months or even years of market goodwill can literally be destroyed over a couple of hours of market action.
The Chinese Stockmarket Smashes The Bullish Environment
Go back to the close of the stockmarket on the 26th February and everything looked fine, the sky was blue and the sea was calm so to speak. Most people were generally bullish and only a few diehard bears were forecasting any sort of trouble ahead.
But then all hell broke lose on the 27th February started by the Chinese mini-meltdown where that market lost around 9% in a single trading session. The bullish market psychology in London and on Wall Street was literally destroyed that day, and the emotions of investors and traders alike shifted 180 degrees - fear was and is still very much in the air.
Like Darts the previous action didn't really matter anymore, all that was important was what was going to happen next.
So What Is Going To Happen Next?
Obviously nobody can forecast correctly, we can only make what we believe are sensible judgement calls but the recent sell off is starting to prove what we wrote back in the January Newsletter. In that issue we suggested that overall the stockmarket is likely to go nowhere in 2007 although the speculative risk is on the downside.
When we said 'nowhere' we went on to suggest that the likely market characteristic for 2007 would be plenty of up and down movement but overall the market had a good chance of finishing the year right where it started. And it's this up and down movement that canny investors should focus on. As the January issue said -
And right now we believe the correct trading/investment decision is still to take advantage of any panic in the market leading to lower prices especially as there's fear in the air. Obviously the FTSE 100 has recovered considerably since it dipped below 6,000 (now trading around 6,300) but nevertheless start to think about these panics as great places to accumulate and add to your current stock holdings.
Why We're Comfortable Buying Into Stockmarket Weakness
The World's Central Bankers are in effect a one trick pony. All they really know how to do, and note this strategy has been pretty successful for the last 10-20 years, is to add massive amounts of liquidity to the system when times are bad or markets are rocky. And many of the Central Banks although they give the impression they're independent are actually controlled by the real people in power, the politicians.
Politicians care little about the votes they're going to get in five or ten years time, it's the votes this or next year that they want and will do almost anything to get.
Although we may laugh at the general incompetence of our politicians they're never so stupid as to realise that there's no bigger vote loser than a slowing economy or one that is in or is heading into possible recession. And if you want to avoid a slowdown/recession the easiest way is to stimulate economic growth by continuing to add liquidity to the economy. In simple terms grow the money supply by printing more money.
This liquidity creates demand for assets which in turn creates higher asset prices and assets obviously include the stockmarket. Of course, like a drug addict you need more and more of the drug to create the same sort of high as when you first started out, so more liquidity has to lead to even greater influxes of liquidity which will at some point evolve into one hell of a financial mess. But the majority of politicians care little about what happens tomorrow. All that is important to them is the votes they can generate today.
In our view the trend of adding liquidity will continue unless the civilised world wants a global depression. Therefore it's a sure bet the printing presses will continue to run 24 hours a day, 7 days a week. This will in turn generally prop asset prices up especially when things look bad as they did at the end of February/beginning of March.
