I was reading my daughter the story of Chicken Licken last night. For those who don’t remember it, an acorn fell on Chicken Licken’s head and she thought the sky was falling in, so she went off to tell the king. The hysteria spread to all the people she told along the way until they were eventually taken advantage of (also see eaten) by the wily old fox.
Why am I telling you this? We laugh at how silly little Chicken Licken was but she is today’s investor.
Take the last stock market crash; caused by CDO’s and reckless lending. That is a good reason not to invest in banks alright. But will people stop drinking Coca Cola or buying medicine because the banks are failing?
Or what about the crash before that? That was caused by people realising that worthless internet companies were in fact worthless (the Emperor was wearing no clothes to reference another kids story tale). But people still insured their cars, homes and businesses and bought washing powder and toiletries.
So why do people rush to sell equities when something bad happens? Because they think the sky is falling in despite history telling us that markets always recover and the most rapid growth is just after the market has hit rock bottom.
When the next crash happens, don’t be like Chicken Licken rushing into cash. Be like the wily old fox and take advantage of those who are panicking.