Despite many and not infrequently quite clear fundamental data, which should indicate the direction of stock market trends, the markets often develop in the opposite direction. This phenomenon is not new, but it has gained in importance with the increased volatilities. So is the stock market shaped by psychological effects? Certainly, this element is also one of the decisive factors influencing price movements. In parallel or primarily, economic realities are also reflected in the emotional world, but depending on the mood, these are perceived and evaluated differently; this statement seems to us to be very topical, but perhaps the currently quite stable stock market anticipates the imminent weakening of acute problems (inflation in general, energy and food prices in particular, Ukraine conflict, sanctions, etc.)? For some investors, the stock market thus turns into a permanent game of "get angry" or even into a psychological trap. If prices rise, the investor is usually underinvested; if they fall, he has too much exposure. In other words: If everything is convincingly clear from a fundamental point of view, there seems to be no need for action; but if the investor has an intuitively correct feeling, he ("and sometimes we") lack plausible arguments. If jubilation or, as in the recent past, panic breaks out twice (primarily in 2020 because of Corona), an almost superhuman strength is required in order not to be carried away by the mood or the so-called "herd instinct". Such situations are never easy, as stock market participants also show emotions: Euphoria in the upward trend, greed in the upward exaggeration phase, fear in the downward trend and panic in the downward exaggeration phase. Unfortunately, we can only estimate trend changes on the stock market and even the supposedly smartest economists will never be able to "calculate" the stock market precisely. Nevertheless, there is or would be the possibility to better perceive the psychological momentum... by becoming aware that the view of reality is often distorted in such phases, or in other words, the perception does not correspond to reality. We will come back to this point on the next page. It is also important to take a temporal view, because the so-called psycho trap is normally only of short-term significance. As a rule, the quality of a company does not change during panic attacks on the stock market. Rather the daily events, short news, the rumor mill up to the Fake News lead to wrong or misleading conclusions. It is not the actual events themselves, but precisely the psychologically motivated reactions of investors that then influence prices. On the other hand, in the long run - as this is confirmed again and again - the emotional behavior of the investment community is not decisive... a clear investment strategy, however, is! As Kostolany already said: "Often you have to close your eyes at the stock exchange, so that you can see better." Meaning, first listen to yourself and listen for fundamental answers to the "stock market feeling".
Unfortunately, this is often not easy, but Financial Behavior (behavioral economics) uncovers irrational behavior. This is expressed in the following, in our opinion, very exciting findings, because behavioral patterns can certainly be proven in studies. Very importantly, the following applies first of all: Since we are usually not able to recognize psychological traps as such, our own psyche must be figuratively locked in a cage in order to maintain control. And how does one do this best: As mentioned, with a well-designed investment strategy, i.e. a basic contract with oneself! You will find the appropriate documents and instructions for this - if required - on our homepage. But now to some behavioral patterns (not exhaustive), starting with the fear of regret: How often do investment decisions come about or not because one fears the sensation of regret and thus misses an investment which could prove to be profitable. However, the investment could also fall and then one would regret the decision. That's the only reason decisions sometimes don't happen... and why it takes the longer-term focus of a consistent investment strategy. Similarly, with loss aversion, no one wants to suffer losses and so this perception is often much stronger than that with comparable gains. One is more focused on avoiding losses than perceiving profit opportunities. Therefore, within the strategy, the much-vaunted diversification is also important, because there are always stocks that lag behind in price or have just lost value. With a too high loss and risk aversion, one falls into the pattern of nominal wealth preservation, i.e. one feels it more comfortable if CHF 100 also remain CHF 100 and better than to accept fluctuations in value. In doing so, one forgets the possible loss of purchasing power. This is exactly what is happening on the markets at the moment: Inflation and saber rattling are causing increased liquidity because of the fear of losses; however, it must be noted that the stock markets are holding up quite well. Another well known factor is the "herd instinct": It is not uncommon for individuals to align their behavior and actions almost unconsciously with others. This leads to the fact that the "herd" can ultimately trigger various irrational effects. This applies to panic selling as well as upward trends, which can then lead to bubble formation or cyclical exaggerations. Mostly, one buys those stocks that are doing well and not those that have fallen sharply. One prefers to stay in the mainstream than to expose oneself as a contrarian. Swimming in the herd" seems to be safer, at least until the wind changes. And in the context of overestimating oneself, everyone has the confidence to get out in time before a trend change or even a crash. Unfortunately, one knows only too late whether it is really a crash or only a technical countermovement. All this and much more is the stock market and as part of it Financial Behavior.
Therefore, at any time - at the beginning of your first stock exchange transactions as well as in the whole course of your investment - place a high value on your personal investment strategy. For such a strategy, however, there are many "patterns" that can be tailored. There is the dividend strategy, the balanced strategy, the value growth strategy, the small cap strategy, the cornerstone strategy, advanced strategies with hedging elements, a mix of the mentioned strategies or even the trading strategy, just to name a few. From our point of view, the primary goal must be: Investing in top quality at a favorable price! As Warren Buffett said so well: "Ask not for the price you pay for a company or a share, but for the value you get for your money." There is another phenomenon to this, probably also as part of a certain "psycho trap": if you set a goal or expect to save net over the next five years, do you wish for higher or lower stock prices? Although one will net buy stocks for many or more years, one is naturally excited when prices rise. This reaction only makes sense if one already holds stocks. But, only those who will (want to) be sellers of stocks in the near future will be happy when they rise. Future buyers, however, should (want to) prefer falling or lower prices. We are only providing food for thought here; the stock market will always remain a carousel where one can (must) jump up or down depending on the speed of rotation.
This brings us to the discrepancy between reality and the current perception of the stock market. Since these are mostly hypotheses, Financial Behavior resonates. However, we are convinced that the stock exchange(s) should have corrected noticeably long ago, considering the current, acute problem areas. When tenants or entrepreneurs, e.g. in Germany, talk about a tripling of energy costs for gas, when oil prices are beckoning from far above, when food prices are rising and in the worst case could even become scarce here and there, when perhaps even the world order is in danger - which, however, we do not believe by a long shot - and when many other commodity prices go through the roof, this should normally have a negative impact on company margins and thus also on the stock exchange. The "Putin escalation" is also not yet off the table, although we do not assume it will be. But the stock market is behaving more or less resistant to all "disruptive factors". What could be the reasons: Inflation alone need not be bad per se for stocks and other tangible assets; on the contrary, in order to somewhat secure the above-mentioned purchasing power, one must or should be invested in stocks. Does this factor alone, together with the still high money supply, support the stock market? Or is the stock market clinging to the great hope that the war will end soon and that the other problem areas will thus settle down continuously? These hopes and the so far self-evidently good corporate financial statements (2021) probably support the markets. If the hopes are actually fulfilled within a useful period of time, this can breathe further life into the "bulls" and keep the foundation of the longer-term investment strategies stable.
In view of the at least short-term divergence between reality and perception, the actually latent uncertainties and the supposed "herd instinct" of a slight buyer overhang, we have also focused the management of our model portfolio on profit taking and optimization. Due to the ongoing dividend phase, we are somewhat in a dilemma in doing so. However, we see another reason for the rather stable stock market here: People do not want to sell (yet), but (first) want to collect the dividends. But what happens afterwards? Could just this year once again "sell in May and stay away" occur? No matter, "healthy" profit taking has never hurt and we do not presume to be able to take advantage of the absolute highs. Details on the transactions can be found in the current issue.
