Money Sundays: Greece, the Media and Bizarro World: Some Thoughts For the Individual Investor

Success in investing doesn't correlate with IQ... Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
--Warren Buffett

Readers, remember back a few years when Greece was supposed to bring down the entire financial firmament? When it was the first domino in a daisy chain of crises that would bring down Portugal, Spain, Ireland, France... and perhaps lead to the breakup of the entire European Union?

Didn't quite work out that way, did it? Here, have a look at a five year chart of the Standard and Poor's 500 Index (a good proxy for the US stock market), where I've marked out a few key points. Forgive me for my crayola-caliber illustration skills:

A) December 2009: Start of the leading ratings agencies' (Moody's, Fitch, Standard and Poor's) downgrades of Greek government debt. At this point the world economy was still reeling from the 2008-2009 banking crisis.

B) April-May 2010: Another rash of debt downgrades, Greece receives its first IMF bailout package, the Greek parliament passes aggressive austerity measures, rioting in Athens. Note: this is more or less when negative newsflow peaked on the "Greece is going to bring us all down" narrative.

C) March-July 2011: Yet another rash of debt downgrades, accompanied by heavy media coverage.

D) April/May 2012: More violence during austerity protests, Greek parliament elections are held, but no party wins a majority, Greece's stock market reaches a bottom at 500 points.

Each of the points represent periods of heavy and highly negative newsflow about Greece. The situation seemed really dire. So dire, in fact, that it seemed obvious that the only prudent course of action was to sell. Everybody else seemed to be doing it.

But as we can now see, each of these points turned out to be excellent moments to buy! And last week's news that Greece successfully completed a major debt offering of five year bonds--at an unimaginably low 4.65% interest rate--puts the frosting on top of this delicious cake of irony. Bakes your noodle just to think about it.

Okay. With this in mind, here are six rules of thumb for readers looking to improve their investing sophistication and acumen:

1) No one ever made a dime panicking. You won't either.

2) When you know what it is that you're supposed to worry about, it's too late to sell.

3) Be in a position where you can comfortably add to your investments when events like this occur. This means you should always carry higher-than-you'd-think-are-necessary levels of cash in your investment accounts. High cash levels are an antidote to panic. Low cash levels make you fragile to panic and bad news.

4) Everything is backwards from what you think. At the very moment you think the media newsflow offers an airtight case for selling, it's much more likely that it's time to buy. Don't let your lizard brain trick you into fearfully reacting to the media. Instead, cultivate a counterintuitive, Bizarro-world mentality about bad news: "known" bad news is not bad news.

5) Note that bad news can always get worse, and that all investment decisions are made under uncertainty. Therefore, never, ever, ever make large "statement" investments (e.g.: I've put all my money in Greek swaptions and Greek olive oil futures!). Add to your holdings slowly, gradually and humbly.

6) Finally, the time to trim back your holdings (again: slowly, gradually and humbly!) is at times like the past few months--or even now: when things seem better, and there's not as much bad investment-related news flying around. This is the converse of point #4, and it's another example of using a Bizarro approach to media newsflow.

The investing realm is often quite cruel to those who overreact to the media. Fear costs you money, and the Greece story arc is just one example of many you'll face over your investing career. Stay counterintuitive, stay humble, and make gradual, incremental decisions with your investments. You'll keep your head while everyone else is losing theirs.

For Further Reading:
Reuters: Greece returns to bond markets, says end of bailout nears
Greek debt crisis timeline at Wikipedia

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Money Sundays: The "Stoplight Rule" For Creating An Emergency Fund
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Money Sundays: Is Looking For Tax-Efficient Investments Icky? Or Intelligent?

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