I want to share with you an article written by myself and Craig Martin, an RIA out of Silicon Valley, in regards to Brexit and, more importantly, about how people do react to these types of situations and how we should react.
BE CALM, THIS TOO WILL PASS: We are in the middle of what will likely be termed as a ‘behavioral finance moment’ by historians. Dan Kahneman earned his Nobel Prize for what is now called ‘behavioral finance.’
What he helped us understand is not what we think about money, but why we think it. He is often quoted when people explain that the human brain is not wired for prudent financial decisions. Take note! That is directly related to what is happening right now because of Brexit last week.
For the most part, investors are unaware of exactly what last week’s Brexit will mean. That still hasn’t stopped them from fearing the unknown. This fear has produced a near-panic scramble to replace prudent investment decisions with a ‘last-guy-turns-out-the-lights’ race to see who can get out of the market the fastest.
Such a sell-off inevitably causes scientific observers to look for an event to blame for the world’s corporations losing 5% of their business last week. Alas, there is no consensus among the professionals about Brexit’s actual results. About 50% are merely supporting the vote with positive predictions, while the remaining 50% are in shock that Brexit actually happened and are foreseeing disaster.
As Kahneman taught us, it is not logic that dominates fear in the human brain, it is an in-the-moment survival mechanism that has proved its success in our longevity on this planet. Our human brain is a wonderment to behold, but it’s absolute failure to make prudent financial choices is obvious in the markets today.
What is happening in the markets can be observed as ‘normally’ fearful investors reacting to their fear of change, a misinformed fear of the unknown. This is paired with the automatic tendency to follow the herd.
Instinctively, we can’t help but to follow the herd, but most smart investors know they should do the opposite. Following the herd is a survival technique when you are a wildebeest trying to keep predators confused and dazed with your numbers. But when it comes to making financial decisions, it is almost always better to do the opposite. As Warren Buffet says, “Be fearful when others are greedy and greedy when others are fearful.”
As far as our company goes, we aren’t too worried about Brexit. Hughes Private Capital offers alternative investments that rarely correlate with the market. This doesn’t mean that they go completely unaffected, but they don’t move with the speed of the market. In fact, our returns often go up as the market goes down. Diversification is really your safest strategy.
In case Craig’s regulator, the SEC, audits this, we will state the obvious: there are various levels of risk and loss in all investments.