The Psychology of
Money and Investing

A Bubble Ready to Burst?

Those Canadian Winter Economic Blues

Psychologically speaking, I think we need a reason to beat the winter blues. We NEED to believe that the economy is improving. We NEED to believe that things are getting better and back to normal. So with low interest rates we continue to buy up houses at bubble like valuations, agriculture land that requires 2% interest to break even and stocks that look great with earnings compared to last year. It makes us feel better to believe that things are improving. This belief in itself tends to inflate prices and distort them from reality.

Assume a 6% prime interest rate and then decide what that investment is worth. If mortgage rates go to 7% or up to 10% for a two year fixed term, what does that do to your personal or investment real estate purchase? What does that do to the stock market if one year GIC’s start paying 6%? We’re not going to have low interest rates for much longer. Let us assume it’s 300 years ago and you have to stock pile food and assets for a long winter. Start getting ready for a very cold, uncomfortable economy.

Why Stocks Have to Go Up

If only wishful thinking could solve our problems

Expectations are that companies will increase earnings and as a result these gains will be reflected in their stock prices. The word expectation is defined as “anticipation: anticipating with confidence of fulfillment”. The tricky part, as mentioned above, is that it is the very expectation of improved stock prices that make them rise briefly, not the underlying values (I’m not talking of good dividend paying stocks here but an overall market index). So the wishing makes it true! If only life were that simple. Boring stocks will plod along, but highfliers will rise significantly as long as these expectations continue to turn downward when that psychology changes and reality becomes obvious.

The Problems at Google

Companies must focus on their strengths

to capitalize on their strengths

I owned Google for a couple of days. When they announced they were getting into the cell phone business, started a power company and had problems in China, I sold my holding.

The issue for me is Google’s lack of focus. When people or companies have a problem focusing on what they are extremely good at and try to do everything that pops up and seems to be a great opportunity, they quickly become average to below average in the quality of their work. In the past GE and Microsoft are good examples. They still dominate many markets but aren’t focused on their core businesses anymore. Fortunately I sold my stock before the steep recent decline in Google. I expect it to continue to decline until they become re-focused on what they truly do better than most.

Google is a SEARCH-MARKETING company. They could capture a significant percentage of the advertising dollars that used to go to television, radio and newspaper media, but they would have to be focused on that, creating new products to compliment their advertising and marketing potential. Until they show that, I’m out.

The New Rules of Retirement

We don't actually want to loaf around

As a psychologist, I often see clients about ready to “retire” but I’m not sure what that really means. They want to keep working, be challenged and make some income just because it’s fun and what they know.

The new retirement is about choice. It’s about leaving one career or job and moving to another on a part time basis perhaps, or starting a new business or consulting firm. To do that, most of us want some form of security (loss aversion) with steady regular income. We will need some cash for a reserve to start that business, but want to know that we will be taken care of should things go south. The new retirement means security of investment income with options to move forward with new calculated risk. I do not see financial services firms or banks providing one-stop shops for those of us in the 50 to 65-year-old age group entering this life phase. It’s not about sitting on a beach, playing golf all day, or living out of a suitcase (although for a few that is the goal until they get bored after a year).

The new retirement is about empowering clients to move forward with this form of freedom. If a financial services firm “gets this concept” it would make a good investment and put itself well ahead of the competition that seems to think we just want to loaf around till we die.

The Group Optimism Index (GOI)
for February

February: -60 (Highest since September 2009-moderately bullish)

0 (Most Negative) - 100 (Most Optimistic)

The Group Optimism Index is a number from 0-100 that reflects my opinion on the optimism in Canada today. It is a measure of collective hope.

The number is based on my analysis of several factors including how the current state of affairs together with economic, political and environmental factors are leading to a “group feeling of optimism”.

Remember that there can be a significant difference on the level of optimism based on the city or region of Canada that we are discussing. Currently Windsor, Ontario would have a score of 12, yet Kitchener-Waterloo a score of 55.

Nationally, the score is generated based on an analysis of factors this month that includes:

Blind Optimism: We are looking for any news that supports what we believe, which is that we are coming out of this recession.

Regression to the Mean: Things looked so bad they can only get better. That makes us feel better. Only what, 6 weeks till spring?

Continued Low Interest Rates: In spite of what the bank of Canada tells the public, most believe that 2.25% is the norm. Why not crank up that line of credit to buy the big screen for the super bowl? It’s basically free money!

Dumb Government: This is the theme every month so there’s no need to explain. They just don’t have a clue when it comes to supporting small business and “fixing” the economy. In the US can you say “socialism”? The problem is that most believe the current president; he is way to good at public speaking. We all feel warm and fuzzy when we hear him speak – “Yes we can………”.

The Shrink's 3 Picks

We know the problems. What's your solution?

Cash: 15% ready to re-invest when things go south.

Insurance: ETFs that increase in value when the market goes down or fluctuates. Be careful. These are very volatile and risky but they actually help me insure my gains.

HXD – $13.40 in March when the market was down it was $36.80, no dividend pure insurance.

VXX – $29.90 in March it was $120.00 per share. Volatility is what increases the value.

These two mentioned ETFs are very risky and only a very small percentage of my holdings. You may wonder what the cause for caution is if the GOI is at its highest since writing this newsletter. Well I’m still 75% invested in stocks, even though many are very boring real estate or utilities, but I see cracks on the horizon. As discussed we feel that things HAVE to get better and so appear to be. There is no substance to this belief.

Book or iTunes Selection
for Beginning Investors

Social Media Podcast by Shane Gibson

Available for free at itunes this podcast is an interesting and educational listen while on the treadmill. Will help you unravel the complex world of internet marketing.

Book or iTunes Selection
for Seasoned Investors

Investment Outlook with Bill Gross

Bill Gross is a noted bond investor and a very knowledgeable economist. Just once a month-free and well worth the wait.