The prospect of easy money never loses its appeal. The centuries are littered with examples of people taking punts on so-called certainties. Tulip bulbs, railway stock, mining shares, hi-tech companies, there is always something.
The point is that if you spot the opportunity to buy in early to what at first may be mere fashion but then have the good fortune to watch it metamorphose into a craze, that turns swiftly into a passion before spiralling into market obsession but, and this is the crucial stage, then make a judicious exit before someone has the temerity to question the “fundamentals”, there is indeed considerable scope for a rich harvest.
For all those who step in on the upward journey and get out at a higher level, whether still on the way up or before a major slide, they too have reason to be satisfied.
However, others, slower to get on board, who pay the high price of excessive dem-and in a market where the supply is limited and who are frequently the only passengers left when the crashlanding occurs, for them, it may well be a “never again” experience or, at the very least, a hard lesson.
Saving and investment is often an emotionally charged rather than an intellectual process. Fear of missing out, more succinctly referred to as greed, is a very human characteristic.
The real problem emerges when the belief creeps in that the market will never fall and that it is not a good idea to disinvest because even when the “asset” takes a dip, it is bound to bounce back up again soon. Similarly, the other side of the coin reveals a straightforward fear of commitment. When markets are depressed and the overall sentiment is that things are never going to go back up, it is a courageous investor who takes the plunge when the majority prefers to remain pessimistic.
But needless to say, it is not as simple as that. Investors left sitting on the sidelines when markets have soared may well suffer from “decision regret”. If of sufficient resolve, they may prefer to await the moment when they can say, with some justification, “told you so”.
Comparable if not greater smugness is, of course, found among those who stay uncommitted, wedded to their deposit accounts when markets have taken a dive.
Such is the deemed fate, therefore, of the inexperienced investor, either to be hit hard or too miss out – actually, not just the inexperienced investor and certainly not merely the retail investor.
Market forces affect amateurs and professionals alike. The only thing that separates the more or less fortunate is timing. Really, the only way to reduce the risk of investing all in one go is to invest a little and often – less of an option for the professional, the absence of which a number of fund management houses may themselves rue.
There are more than a few executives of investment management businesses who have taken decisions over recent years to buy into similar operations.
This was often on the basis that they were deemed to be potential front-line beneficiaries of the as yet largely non-existent wave of new investors wanting to secure their financial future.
They may now be the first to realise that the type of letter that they are currently writing to their retail investors who complain about their fund performance, contain the very wisdom that they themselves need to digest.
To paraphrase, in the face of an investment error, recognise that you are going to have to be patient, that you are now in it for the long term or get out now and learn something from the loss.
Anne McMeehan is a director of Cauldron Consulting