Investing At The Point Of Maximum Pessimism


Investing At The Point Of Maximum Pessimism

Every ghost story should start off with the sentence: "It was a dark and stormy night." Setting the stage at the very get go helps to frame the plot of what could be our very last read. Like most things in life, it is rarely as bad as we think from the physical hints. On the flip side, it is rarely as good as we perceive on the sunny days. There is always something lurking above - and below - the surface. One of my favorite investment colleagues penned the book titled "Investing At The Point Of Maximum Pessimism." The lesson learned from this work is that going against our "gut" can be very difficult, but very lucrative.

VIX As Fear Gauge

The CBOE Volatility Index (AKA VIX) is often referred to as a fear gauge for investor sentiment. It measures the implied volatility - or bounciness - of the S&P 500 at-the-money call options with a one-month expiration date. The intent is to provide a current sense of how much fear is in the US stock market as measured by the S&P 500 index. The chart shown below shows that the three biggest peaks for the VIX surfaced in August 1998, October 2008, and March 2020. The current reading of the VIX (around 20) suggests that we have some elevated fear, but nothing that would indicate we are at a point of maximum pessimism.

Source: Yahoo! Finance

Hitting The Rock Bottom

In the late 1990s, a couple of very successful and very intelligent portfolio managers at none other than Fidelity Investments finally threw up their hands effectively saying: "I do not get it anymore. Maybe everything I was taught at business school was wrong." Their own emotions got the best of them and their retired - just before their value strategies would have saved their shareholders a boatload of money in the 2000-2002 bear market. One of my other investment colleagues claimed that they knew the market had hit the rock bottom in March 2009 by the number of clients who called their office.

We Have Found The Enemy...

...And it is us. Again, we harp on the almost complete disconnect between our fight-or-flight emotional response to market events and the cerebral solution to a long-term funding challenge for a goal like retirement. Our next blog post will dive into one specific approach to reduce our emotional "baggage" by automatic deposits on a set periodic schedule. This practice is called dollar cost averaging and it allows us to purchase more shares when prices are low and fewer shares when prices are high.

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