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Seriously: Don't panic
The overwhelming majority of stock-market participants follow emotions, not logic. Don't do that.
When the stock market turns downward as it recently has in aggressive fashion, the evidence emerges just about everywhere to make one thing perfectly clear: The overwhelming majority of market participants follow emotions, not logic.
■ Certainly, the Federal Reserve's decision to raise its benchmark interest rate by 0.75% -- a large number in practical terms -- reveals serious concern on the part of its economists and policy-makers that inflation needs to be brought under control, and quickly. Energy prices are way up, but so are many other consumer prices -- and if you look at prices upstream of consumers, there's more inflation still baked into the cake.
■ But there is only one sane response to inflation: Enlarge your defensive perimeter around the pricing you control. Individuals of working age should expand their personal pricing power in the market by expanding or enhancing their skills. The harder it is to replace a person's skill set, the more they have the capacity to ratchet up their own prices (in the form of wages, service fees, commissions, or the like) to keep up with inflation elsewhere.
■ Firms should seek ways to maximize the value they add to whatever it is they sell. Almost every firm depends upon other firms, either upstream or downstream of them, before a product or service is ultimately delivered to a customer. The larger the increase in the total value added from the time the firm takes its inputs to the time it delivers its outputs, the more say it can have in its own future.
■ Investors should concentrate on opportunities where prices can adjust to keep up with inflation. For inflationary fears to manifest themselves as stock-market panic makes no sense at all. In general, bailing out on stocks and doing anything to lock investment funds into fixed assets (whether bonds, precious metals, real estate, or speculative goods like cryptocurrencies) is a plainly bonkers move.
■ Yet at the margins, lots of people are succumbing to selling sentiments. It's always hazardous to anthropomorphize the stock market or to seek simple explanations for complex systems, but it's not hard to find worriers.
■ This is why Warren Buffett can preach about intrinsic value to anyone who will listen, as he has done for decades, without ever facing any real challengers -- even after giving away his advice for free. Emotions all too predictably rule the day, and that's just plain nuts.
■ Emotions have their place in almost every other scope of human endeavor, but it is almost always self-defeating for people to bring their feelings into play where the abstractions of money are involved. If inflation is on the rise, that effect is generally far from the control of any individual. But the choice to avoid panic and to take rational steps to respond remains in every person's hands. As Calvin Coolidge recommended, "If we cannot control our environment, we can control ourselves and our destiny. The man who is right makes his own luck."
[Originally published in the Evening Post & Mail on June 20, 2022]