Consumer buying patterns have been studied by economists and sociologists forever. How and why consumers respond to product marketing programs basically comes down to how our brains are emotionally wired. That said, consumer products and services companies of all types have figured out that advertising “discounts” is a tried-and-true method to create a positive emotion which can ultimately drive future sales. We all love discounts and are much more likely to buy something on sale, even if we don’t really need it but like it anyway. When it comes to investing for retirement though, we experience a much different state of mind.
Storewide Sale
How often do you walk into a mall and buy something for full price? For me, very rarely if ever. For example, I am always lured in with types of signs advertising something like “Up to 50% discounts storewide.” How can you pass that up? The Eddie Baur store near me has such a sign up for what seems to be permanently. Many stores seem to have perpetual “Clearance Racks”. Those advertisements are even more difficult to ignore.
We are always looking for the best deal on an item, even if we don’t really need it. Apparel and other consumer product companies have clearly embraced such advertising. I believe their strategy involves pricing items well above true market value and then offering them at “steep” discounts giving the consumer the positive feeling they got a great deal but in truth they probably ended up paying close to true market value.
This type of behavior is how it should be. Consumers know that many products’ list prices are too high so are willing to wait until prices come down before buying.
Stock Market on Sale
So why aren’t investors as enthusiastic in the same vein when it comes to stock market corrections? This again is a behavior that has been studied for a very long time. A recent survey done by Allianz Life, a large, global institutional money manager, showed that only 1 in 4 investors believe now is the time to be buying stocks. We all know the adage “But Low/Sell High” but more often, the other adage, “Buy High/Sell Low” is what ends up happening.
Fear of missing out (FOMO) became a common term as the market soared to new highs following the pullback in March 2020 when covid began to rage across the globe. The environment during that time was nothing like anything we have seen before and in hindsight, several reasons have been discussed as why the market did what it did. There was too much cash floating around in the economy with no place to go so, into the markets it went. Stock prices for so many companies who were and continue to be far from profitability would not stop going up. It appears, the more expensive a stock became as it climbed in price, the more investors wanted to buy it regardless of if they understood what business the company was in. A retired market strategist I worked with for years described this behavior akin to a fish following a flashy lure through the water only to catch it which didn’t end well for the fish. In that environment, the FOMO feeling was on full display. It was clear to many analysts that high flying, profitless technology companies were overpriced on all manner of financial analysis and rationale, but no one was listening.
The S&P 500 and the NASDAQ indices both reached their historical highs in December 2021 and then abruptly began their correction through June of this year. As weakness began to creep into the markets, investors, many with little knowledge of the stock market, began to panic.
The realization that stocks don’t always go up rattled investors and they began to sell even as stocks became cheaper and cheaper.
As we sit here today, many stocks that were overvalued when the markets were hot and luring in investors, are now arguably back to fair valuations with many below fair market value.
Bruised and battered investors have been very leery to get back into the market. The survey noted above showed that 65% of investors feel they are keeping more money out of the market than they should out of fear of more investment losses. Simply put, when the market is shooting up, people throw their money at it. But when market is doing poorly, they are keeping their money out.
In our opinion, this type of behavior is the opposite of how investors should be looking at the stock market.
Wrapping Up
Timing on when to buy a consumer product is easier to predict than timing on when to invest in the stock market. All of us here at Mountain Capital firmly believe that attempting to time when to invest in the markets is, in the long run, a failing strategy and there are countless studies confirming that. Some folks may be able to successfully get out of the markets near the highs and then get back in near the lows on occasion, but odds of continued successful timing are very low and are not a risk we are willing to take. We have and always will be focused on the long term as the best investment strategy for our clients.
