Cultivating, retaining and sustaining another’s business does require a bit of hubris which could be viewed as confidence. And confidence is necessary when what you do with a client’s money can mean the difference between their security or destitution.
I pulled this from tonight’s Fin Times from some in depth look at the ‘87 crash...Pro if you have been doing this for 15 years you wouldn’t remember!
“So crashes can be great buying opportunities, but only if markets reach favourable valuations and if there is reason to be confident in the underlying economy.
Can they be prevented? Markets are different now. Average daily volumes on the New York Stock Exchange alone have increased tenfold since 1987, the venues on which stocks can be traded have proliferated and the speed of trading is unimaginably faster. The range of hedging opportunities using derivatives is much larger than it was.
The view from the floor is that the improvements in technology will not prevent crashes. “But it will help them happen that much faster,” says Mr Cashin, the veteran broker.
Andrew Lo, an economist at the Massachusetts Institute of Technology, argues that these developments have also made crashes more likely. “We have a much more well-integrated and well-connected set of financial markets. Disruption in one market can very easily spill over into other financial markets.”
He draws comparisons with recent events, which saw a number of quantitatively managed hedge funds – which use complex mathematical algorithms to trade swiftly among different stocks and asset classes – suffer huge losses in August amid the fall-out from the credit crisis. Portfolio insurance, Mr Lo suggests, was “a microcosm of what we see today, writ large”.
Further, a growing field known as neurofinance attempts to apply insights from cognitive psychology to decisions made by investors. These insights suggest that the human mind is “hard-wired” to make the kind of collectively irrational decisions that can lead to crashes such as Black Monday. No amount of technology will change this.
According to Richard Peterson, author of Inside the Investor’s Brain, when markets are rising, investors show primitive “chasing” behaviour, expecting gains. Once gains fail to fulfil their expectations, the loss-avoidance part of the brain is engaged. This is when herd instincts come into play and sentiment grows more negative. Then comes panic – and the crash.
These factors are constant. Mr Peterson suggests that investors can try to be more emotionally self-aware, but this is difficult and requires behaviour that many people find unnatural.
Mr Lo puts it differently. “Our brains are hard-wired and optimised for decision-making on the African savannah 100,000 years ago,” he says. “If we are being chased by a sabre-toothed tiger, it’s perfectly appropriate for the brain to get a shot of adrenaline and run like hell. Unfortunately, that won’t help you on the floor of the NYSE when the S&P is down 20 per cent.”
Yes, Irrational decisions, that is what I’m talking about...
1987 was NOTHING like being a rep during 2000-2003. 1987 recovered within what, 11 or 15 months? Many of my clients and colleagues were there, and I’ve read the books. Granted, nothing like being there though.
You know what it is like to wake up every day, see the market down another 200 points, just like yesterday? Then Bill Gross says 5000? Was like chinese water torture. A ton of people left the biz during those three years, couldn’t take it, or make money.
But, i did some very smart things back then, based on reason, logic. I also worked EXTREMELY hard. From 2000 to now, my book of biz increased by 400% in AUM. My clients (1200 hhlds) made money, very few bailed out, even though they were tempted. I did whatever it took, to keep them properly allocated too, so that when the markets recovered, they made all the money back, then some.
PS, i love the hubris part! It’s true, you better have that or the customer doesn’t listen, or think you believe in your own story. Conviction/hubris... I get it.
Or that common malady known as, "Buy high, sell low."
yitbos