Why most investors are mostly wrong, most of the time (page 1 of 3)

Was there not far more 'uncertainty' in the market place during the high tech and telecommunication mania of the late 1990s!

After all, none of the then favorite companies from Cisco, Sun Microsystems and Amazon.com to PCCW delivered the, by investors, expected returns. Just about every company in the high tech and telecommunication sector has badly disappointed not only in terms of delivering earnings growth, but also in terms of its accounting practices and management integrity!

The problem is really that uncertainty is always with us, but near market tops, investors throw caution to the wind and become 'certain' that the up-trend will last forever. In other words, at market tops an overwhelming majority of market participants become convinced that there is no uncertainty and, therefore, pay totally ludicrous prices for investments whose future returns are in reality, and under the scrutiny of a critical analysis, 'highly uncertain'.

A 'certainty' in the minds of investors incidentally also occurs near market lows when economic, political and social fundamentals become horrible. Then, investors become also convinced that the market will never recover again and decline even more. At that point investors truly 'give up' and want to get out 'at any price'.

In my opinion, there always exists the same uncertainty about the future, but it is in our minds that the perception about uncertainty changes over time. Near market tops uncertainty becomes perceived certainty about future huge profit opportunities and leads to overconfidence, credulity, irrational behavior, and excessive optimism.

Similarly, near market lows uncertainty becomes certainty about an impending economic and financial meltdown and leads to desperation, gloom, and excessive pessimism within the investment community. The reason I am mentioning these facts is that it has been my experience that investors tend to buy homes, stocks, bonds, and commodities at the wrong time, namely then when their prices are already high, but fail to do so when prices are low, as they are now in the case of Asian stocks.

This observation applies incidentally even more so for international investors. Looking at international money flows over the last 20 years the following is striking. During the golden age for Asian stocks - that is between 1985 and 1990 - when markets like Taiwan, South Korea and Indonesia rose by between 10 and 20 times, foreigners were largely absent from Asia. Then after 1990 - encouraged by the Japanese success story - foreign money began to pile into Asia and European funds frequently had a larger exposure to Asia than to the US. In fact, record foreign purchases of Asian stocks were registered just prior to the Asian crisis in 1996!

However, after the 1997 crisis, foreigners remained largely net sellers of Asian equities right up to this very day. Instead they began to pile into US equities after 1997 and purchased a record amount in 1999, 2000 and 2001 right around the peak of the US market. 'Buy high, sell low' seems to be the mantra of international as well as most individual investors when it comes to investment decisions, a fact that has always fascinated me for the simple reason that in markets for physical goods, individuals behave far more rationally.

Housewives will usually defer their purchases until stores go on sales and then buy when prices have been marked down. Or when the price of beef goes up substantially, housewives will buy more chicken and lamb and curtail their families' consumption of beef.