Fear and greed

We bought dollars for a client recently at R12.60/$. It just seemed wrong; the rand is way under-valued and yet in the short to medium term there is absolutely no good news to suggest that it will get stronger any time soon. And yet it probably will. We know this because it has happened before.

Remember 2000/2001 where the stories of people getting money out of SA at all cost are now the stuff of legend. Money in socks, money in friends’ suitcases, money in underwear – we all (almost) thought that the slide was going to be indefinite and unstoppable. A few years later and things turned around again – significantly. We went from almost R14/$ to close to R5/$.

We know that over time the rand should weaken against the major currencies because of our inflation differential but there are surely times when the weakness is exaggerated.

I remember one of the very first financial planning conferences I attended. The speaker was talking about our emotions and investing and how the biggest driver of financial markets can be attributed to just 2 emotions: fear and greed.

He spoke about how investing is about probability of returns and not prophecy. We don’t know when markets will rise or fall and we don’t know which asset class will give the best returns next year but we do know that on balance of probability (built up over a very long time) that as an asset class, equities will outperform property which will in turn outperform bonds which will outperform cash (after tax). This is a fundamental consequence of the risk/return relationship. And yet in the short term, markets are often driven by emotions which cause them to over-react. We have seen this many times before and we will see it again. I think the same applies to the rand.

One example of fear (as an emotion that drives us) is of how after every major airplane disaster there is an immediate increase in the purchase of travel insurance. This is not rational – the probability of being involved in a plane crash has not changed and yet peoples’ perception is that it has and so they behave in an irrational way by buying more travel insurance. Fear is the driver of behind this.

Right now, the rand’s weakness is not (only) about SA Inc. and SA politics (as bad as they are). Rather it is about commodities being decimated because of a decrease in Chinese demand and about an anticipated US interest rate increase. We are not the only currency in the proverbial!

I am also reminded of a well-known quote by Warren Buffet which cautions investors to “be fearful when others are greedy and greedy when others are fearful”. I can’t help but think that this has to apply to the South African Rand at the moment. Once again, it looks like we are on a never ending downward spiral but surely sense must return to the markets and at that stage the rand (along with many other currencies) will strengthen against the mighty US$.

If you are a long term investor then bide your time, don’t be driven by emotion and panic.

Consider the following quotes from Benjamin Graham. “Most of the time stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble…to give way to hope, fear and greed.” “Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.”

And finally, “The psychology of the speculator militates strongly against his success. For by relation of cause and effect he is most optimistic when prices are highest and most despondent when they are at the bottom.”

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