3374: The Market Herd Is Human Nature by Chris Reining on Thinking Independently

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[00:01:00] This is Optimal Health Daily. The market heard is human nature. By Chris Reining of chrisreining.com. And I'm Dr. Neal Malik. Hello and welcome back to our Sunday bonus episode. This is where I share an episode from another podcast in our network. And today's comes from Optimal Finance Daily. You can find that show wherever you're listening to this. Diana covers saving, investing, and earning more every day of the week.

[00:01:26] So with that, here's Diana reading for you and her commentary as we optimize your life. The market heard is human nature by Chris Reining of chrisreining.com. A scorpion asks a frog to carry it across a river. The frog hesitates, afraid of being stung. But the scorpion argues that if it did so, they would both drown. Considering this, the frog agrees.

[00:01:56] But midway across the river, the scorpion does indeed sting the frog, dooming them both. While drowning, the frog cries, but why? Replies the scorpion, it's in my nature. Just like the scorpion, it's in our nature to do what humans do. For one, we obsess about low probability events and take risks on the high probability ones. Like being terrified to fly on an airplane, but not wearing a seatbelt when driving a car.

[00:02:27] Getting out of the stock market when it falls and getting back in when it rises. Most people might not know it at the time, but that strategy, selling low and buying high, isn't the best way to invest and make money. Making matters worse, the financial news media lines up so-called experts to make predictions about the market. It's mostly nonsense, because don't you think if analysts, economists, or strategists knew where the market was headed, they'd be investing for themselves instead of working for a salary?

[00:02:55] It's extremely difficult to know what the market will do. Often impossible. So what happens is people listen to all the pundits, look around what everyone else is doing, and just do that. I don't know much about this. They know more than I do, so why shouldn't I follow them? Now from an evolutionary standpoint, following the herd makes sense. That lone zebra grazing out there on the grasslands is an easy meal for the lion. But if it stays with the group, it survives.

[00:03:23] That safety in numbers thing. And this herd behavior you've seen in countless nature documentaries is how people behave in the market. They panic and sell because everyone is panicking and selling. Also, what fuels this behavior during drawdowns is the fact that stocks are liquid assets. They can be bought and sold with the click of a mouse. Look, you wouldn't sell your house if some real estate database said the price fell 10%. So why sell stocks if the market says the same thing?

[00:03:53] The more you think about this, the more it makes sense. First of all, you have the constant media coverage of the market. And secondly, that market is continuously nagging you to do business with it. Which reminds me of the story Warren Buffett told about buying a 400-acre farm north of Omaha, Nebraska. If a moody fellow with a farm bordering my property yelled out a price every day at me, which he would either buy my farm or sell me his,

[00:04:21] and those prices varied wildly over short periods of time depending on his mental state, how in the world could I be other than benefited by his erratic behavior? If his daily shoutout was ridiculously low and I had some spare cash, I would buy his farm. What he's saying is, when the market falls, it provides an opportunity for the long-term investor. Buffett's mentor, Benjamin Graham, got this right when he said, make the market your servant, not your master.

[00:04:50] The truth is, making the market serve you means exploiting human nature. That's how to make the most money investing. And isn't that the whole point? To make money? So when everyone is panicking and selling, you run against the herd and buy. Of course, this is easier said than done. Plus, it's hard to explain what it's like. You need to experience it firsthand. Maybe an example would help.

[00:05:14] In 2006, before the recession, I took a small stake in Starbucks at $19.12 per share. At the time, it was trading at a high valuation. The price-to-earnings ratio was 53. Two years later, during the recession, I bought more shares, but this time at $9.04. The price-to-earnings ratio was 21. Better price, better value. It wasn't long before the share price dropped under $5.

[00:05:44] Sitting there watching your $19 shares go to $9 is easy. You tell yourself it's just a paper loss. What's hard is opening your wallet to buy more. But then watching all your shares fall below $5, now that's the hardest thing. You think, maybe everybody else is right. I tell this story because Starbucks now trades around $60.

[00:06:08] The $19 shares are up some 200%, but the $9 shares are up 550%. If you had bought shares at $5, you'd be up 1,100%. What you learn is that even if you buy stocks at the worst possible time, like right before a recession, you can still make money. Ben Carlson proved that. But if you want to make the most money investing, you need to do what most people can't do.

[00:06:37] Buy when everyone else panics and sells. The problem is that means going against human nature, and human nature never changes. You just listened to the post titled, The Market Herd is Human Nature by Chris Reining of chrisreining.com. If you're a small business, the right hire can be make or break. Hoping the right people see your job posting isn't the best growth strategy.

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[00:08:30] This article is a great reminder that when we invest in the stock market, we're signing up for a roller coaster ride. When the roller coaster starts, it's downward spiral and everyone around us is screaming and freaking out. The worst thing we can do is unbuckle our seatbelt and jump off. And most of us wouldn't do that on an actual roller coaster, right? Because we got on the ride knowing that there were going to be ups and downs.

[00:08:59] We need to get on the stock market ride with the same knowledge. There will be ups and downs. But if we stay on, we can enjoy the wind in our hair on the way to financial freedom. Because the market always goes up. Always. Not over the course of any one month, year or day. But over the long term, it does go up. And in the many years you will be an investor, you should expect some big crashes and recoveries.

[00:09:26] While the media will say, oh, but it's different this time. We're all headed for financial ruin. And that's like saying on the roller coaster's descent, it's just going to crash horribly into the earth and we're all going to die. Is that possible? Sure. But if it did, we're all dead anyway. And in the financial sense, it's not going to matter if you invested your money in stocks or stuffed it in your mattress. It'll be worthless.

[00:09:51] So even in the absolute worst case scenario, the advice is the same. Stay on the roller coaster. That'll do it for today and another installment of Optimal Finance Daily. Have a happy Thursday. Thank you for being here every day and listening. And I'll see you on the Friday show tomorrow where your optimal life awaits.