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How I Learned to Stop Worrying and Love Market Fluctuations

InvestorEducation / Trader Psychology Aug 28, 2015 - 11:24 PM GMT

By: John_Mauldin

InvestorEducation

Patrick Cox: Most of you know that my day job involves finding disruptive technologies for investors. Most of you also know that the stock market has recently taken a southward plunge.

When I was younger, I always wondered why big fluctuations in markets seemed to cause so many people so much anxiety and consternation. It’s not as if we don’t know that, historically, markets have always displayed big swings. Understanding this, it always seemed clear to me that a rational individual would not invest money in equities if that money might be needed in the short run.


Obviously, I have a tendency to overestimate other people’s rationality because every one of these big swings inevitably creates the same predictable tsunami of lamentation and dread. So, once again, I’m feeling like an outsider in this industry. Not only am I emotionally unaffected by the market’s downturn, I’m pleased… for several interrelated reasons.

One reason is that fluctuations induce resiliency. A steady predictable market is a market that is susceptible to being stampeded, either up or down. Neither is particularly good for the economy. Nevertheless, the traders who take big paper losses when the market takes a nose dive tend to sell off, allowing investors to buy at reduced prices. This is good for the economy. Big fluctuations tend to move resources into the hands of investors, where they are less volatile and better serve the overall economy.

This means that fluctuations serve the interests of serious investors. The secret to success in the market is to “buy low and sell high.” Mathematically, this investment philosophy is pretty much impossible to implement if the market is never low. If you’re an investor rather than a trader, you welcome big downturns because they provide bargain prices.

I’ve talked to several other investment analysts recently about this and none of them share my perspective. They know that I’m right about the long run, but they worry when their customers are worried. My policy, however, is to make sure that my subscribers know that such events are going to happen as surely as the seasons change. Moreover, I make sure to tell them that they should always be prepared to exploit the panic of the herd to add beaten-down stocks to their portfolios. If you implement this strategy, big downturns (like the one we’ve been seeing) are huge financial opportunities as well as a reason to celebrate.

There is, however, a third reason to welcome downturns. Sometimes, markets need to go down.

If the world reflected the wishes of investors and analysts, stocks would all go up… forever. But that’s not how the world or capitalism works. For progress to be made, innovation has to replace established and formerly successful businesses. Joseph Schumpeter, probably my favorite economist, coined the term “creative destruction” to describe this process.

The concept of creative destruction may seem oxymoronic simply because most people don’t think of destruction as a positive or creative process. Schumpeter, however, was an economist versed in the biological sciences. He was well aware of the fact that evolutionary processes always move forward by doing away with less adaptive systems. Creation of the new requires the destruction of the old.

A lot of people don’t understand or like this, but the extinction of species is the cost of adaptation. For innovation to move forward, the old order must die. Typically, investors are among those who fear this sort of change.

This brings me back to my original question: “Why aren’t I bothered by the destruction inherent in market downturns?” Prior to having my genome sequenced and analyzed, I had no clue. In fact, I never expected to have any sort of insight into why I am the way I am.

That changed when my genome was sequenced and analyzed by brilliant genomicists. Besides having markers associated with autism, I have significant contribution of genes associated with Neanderthal ancestry. Both characteristics are believed to reduce emotional sensitivities, though hopefully not in any sort of sociopathic way. In fact, the analysis of my genome was unsettling in many ways… simply because I saw so many of my personal characteristics in the code of my DNA. I’m not saying we are biological machines. I am saying, however, that there are sophisticated and subtle things about every one of our personalities and natures rooted in our genes. Next week, I think I’ll get around to telling you how my sequenced genome settled a generations-long argument my father’s family has had about our racial makeup.

I think it’s appropriate that there be some sort of personal impact from genomics. The decoding of our software is, after all, changing everything. Genomics may be the single greatest source of creative destruction our species has yet seen.

What we know today about the genetic causes of disease is changing medicine, but we’ve only begun to unravel the double helices of our fates. Every day, some new genetic discovery opens up new avenues to increase human health and health spans.

The implementation of this new knowledge will not be a consistent process. It will be creative destruction at its best, yielding dramatic improvements in healthcare technologies while leaving entire sectors of the economy in ruin.

Despite the fact that everybody knows our healthcare institutions are obsolete and failing, many of those in the crosshairs of creative destruction are whistling in the wind, pretending that all is well. Moreover, they will resist change with their considerable institutional resources. But they will lose. And they will lose sooner than almost anybody expects.

Last week, I talked about Eric Topol, M.D., the cardiologist, geneticist, researcher, and writer who serves as Director of the Scripps Translational Science Institute in La Jolla, California. Topol is predicting rapid and radical change in the ways that healthcare is delivered. I’m currently reading his new book, “The Patient Will See You Now: The Future of Medicine is in Your Hands.”

If you don’t want to read a book, I would really recommend watching the following video about the way digital medicine will change and improve healthcare. This wakeup call is appropriately titled, “Creative Destruction of Medicine.”

Delivered at Strictly Mobile 2014 in Mountain View, CA, it is primarily about the impact of mobile devices on healthcare, but he refers to the much bigger impact that genomics will have on medicine. It’s not surprising that he only glosses over this area, however, as it is a topic way too big for a YouTube video.

Patrick Cox

From the TransTech Digest research team: To begin reading Patrick’s Tech Digest newsletter for free each Friday, simply click here. At Patrick’s Transformational Technologies site, you can join Tech Digest by entering your email address at the top right of the page. Thanks for reading.

The article TechDigest: How I Learned to Stop Worrying and Love Market Fluctuations was originally published at mauldineconomics.com.
John Mauldin Archive

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