The following is an excerpt from the July issue of The Sizemore Investment Letter.
You will have to pardon me if I am a little sentimental this month. You see, dear reader, it is that time of year again. July 6 marks the beginning of the Feria de San Fermin. For one full week, thousands of otherwise sensible young men—and plenty of not-so young men too—will throw reason and commonsense to the wind to run with the bulls through the streets of Pamplona.
There is a widespread—and false—belief that the boys who participate in the encierro are drunk. Surely, no sober person would do something as phenomenally stupid as run in front of a 2,000-pound charging bull. Yet sober they are. The running of the bulls kicks off at 8:00 am, and at that hour the drunks are still passed out in the park from the excesses of the night before.
Why do they do it?
I can tell you, dear reader, that I have no idea. And yet I was one of those foolish boys running for dear life not too many years ago. After finishing my master’s program in London, I flew to Bilbao and drifted across the Basque Country and Navarra to Pamplona. I too, for reasons that made little sense then and even less today, donned the uniform of the fermines—white pants and shirt, red sash around the waist and bandana around the neck—and joined the other runners on the Calle de la Estafeta.
I blame Ernest Hemingway for making San Fermin sound so cool, but suffice it to say, we humans often act in ways that are a little less than rational. Nowhere is this more apparent than in the financial markets.
A host of emotional factors—fear, greed, pride, jealousy, the need to be accepted by others, etc.—conspire to lead us to bad decisions. We sell when we should be buying, and we buy when we should be selling. We flock to popular assets—whether they be tech stocks in 1999, Miami condos in 2006, or precious metals today—at precisely the wrong time, and we ignore quality investments—such as U.S. blue-chip growth stocks in 2009 or bonds, dividend-focused stocks, and commodities in 1999—that are right under our noses.
In The Sizemore Investment Letter, we are committed to avoiding these kinds of behavioral traps by focusing on macro trends with staying power—such as the family formation of the Echo Boomer generation in the United States or the rise of the new middle and wealthy classes in China and other emerging markets—and by following the timeless advice of Warren Buffett to “be greedy when others are fearful and fearful when others are greedy.”
Investors were fearful in May and June. Greece—yet again—kept world financial markets on edge at it toyed with default. A slew of bad economic data implied that the U.S. recovery was stumbling. And perhaps most worrying to investors, the end of the Fed’s “QE2” loomed imminent.
But then a funny thing happened. Rather than go into meltdown mode, the market rallied strongly. The market had already discounted the bad news that was cluttering the financial news networks, and stocks were cheap. Investors—including SIL readers—who were able to keep a level head and focus on the macro trends that actually matter stayed invested or even added to their positions.
The rest, as they say, is history. Wall Street is having its own running of the bulls.
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Charles Lewis Sizemore, CFA
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