Posted by Mary Caraccioli | Filed under Investing
In his annual letter to shareholders Warren Buffet wrote, “The investment world has gone from underpricing risk to overpricing it.” This Buffet argues is leading to yet another bubble in a decade that has seen its share of them, tech, housing, oil, and now Buffet and others say U.S. Treasuries. While the other bubbles of the decade were fueled by rampant speculation and unsustainable returns on investment, the treasuries bubble is different.
It is fuel by what Buffet called the over-pricing of risk, commonly known as fear. It’s palpable. I hear people talking about their fear of the financial markets everywhere, from social situations, to the waiting room at the dentist office; to just about anywhere people are forced to make idle chat. Instead of the weather, the favorite gripe is how miserable everything has become, including how battered their investments. The consensus “I just don’t want to lose anymore money than I already have in the market.“ Others say, “Making money is for another day, a day when there is a little more clarity about corporate earnings and the economy.” And then there is this common complaint, “I have watched my retirement fund get cut in half, I just can’t make money in the market.” The result of all this negative sentiment and the over-pricing of risk and an indiscriminate sell off of every asset class. Until the dust settles, most investors believe only U.S. Treasuries will do.
When everyone is getting rich, it’s easy to think of your self as a maverick who embraces investment risk. But the reality is that most investors and most people are way more risk averse than they give themselves credit for being. Now, that once hidden aversion is causing the proverbial pendulum to make a big swing in the other direction. So, instead of recklessly using our homes as our piggy banks, we have found religion. But how do we use that wisdom to guide us away from the herd going forward? That is the question we have to ask ourselves. The old cliché is that it is darkest before the dawn. As the economy looms large over our every move these days, Buffet reminds us to embrace the darkness, “When investing, pessimism is your friend, euphoria the enemy.” The pessimism didn’t prevent him from buying, it helped him find the opportunities, he said ”In our insurance portfolios, we made three large investments on terms that would be unavailable in normal markets.” Embrace the fear, its healthy, but don’t forget to occasionally ask yourself “what opportunities are out there for me.” – Mary Caraccioli