How does fear-based investing drive today’s market, and why should you care?

Why do simple investment strategies outperform complex ones according to Joshua Brown?

Discover the secrets of investing with Joshua Brown’s “You Weren’t Supposed to See That” (2024). Learn why automation fuels fear-based investing, how fee-based models change markets, and why simplicity beats complexity. Read the full article to master the psychological edge in investing, learn to spot reliable price signals, and build a resilient portfolio that withstands market noise.

Genres

Money, Investments, Personal Development, Career Success

Introduction: What’s in it for me? A no-nonsense guide to financial markets

You Weren’t Supposed to See That (2024) draws on fifteen years of insights from The Reformed Broker, the most-read financial blog in the world. An essential compilation of financial wisdom, it reveals crucial, sometimes startling truths about finance, investing, and Wall Street that are vital for today’s investors.

Joshua Brown, You Weren′t Supposed To See That, Secrets Every Investor Should Know. In the bustling world of finance, where stock tickers flash and pundits shout from every screen, it’s easy to get lost in the noise. Every day, millions of investors pour their hard-earned money into markets with the hope of securing a prosperous future, yet the fundamental questions often go unanswered. What is the real purpose of investing?

Why should we care about stocks, bonds, and market trends? And ultimately, what are we trying to achieve through our financial endeavors? In this summary, we’ll be trying to answer those questions. We’ll come to understand not only how investment works, but also how it relates to the larger picture of an investor’s life and legacy. Let’s dive in.

Automation is spurring a new wave of fearful investment

Automation is spurring a new wave of fearful investment. In a world increasingly dominated by automation, individuals are grappling with a stark reality where traditional roles in job security are rapidly diminishing. Automation, represented by robots, software, and algorithms, is taking over tasks once performed by humans across all sectors. This shift is not just a technological revolution, but also a deep economic and social transformation.

People are witnessing the erosion of their roles and feel a palpable loss of dignity as their purpose in society diminishes. This seismic shift has led to a profound impact on investment behaviors, marking potentially the first fear-based investment bubble in American history. As robots and automation technologies advance, capturing more of the labor market, people are increasingly compelled to invest out of a sense of fear and survival rather than greed. Those who own these technologies find themselves on the winning side of an economic divide, while those who are displaced face dwindling prospects. In response, there’s a rush to invest in the very technologies that are causing this upheaval. The logic is grim but clear.

If you can’t beat them, join them. Technology stocks like those of Facebook, Google, and Amazon aren’t merely investment opportunities. They are essential lifelines for those trying to maintain economic relevance. Amidst this backdrop, advice to displaced workers often includes enhancing their education, learning new skills, or moving to cities with more opportunities. But such advice increasingly feels inadequate in a world where artificial intelligence is poised to take over sophisticated tasks, including creative and professional jobs previously thought immune to automation. The relentless advancement of technology suggests that there are no safe havens left, challenging the very essence of human contribution.

As a result, people are not just investing for retirement or wealth accumulation anymore. They are investing as a defensive strategy against obsolescence. In an era where technological entities spend every moment trying to supplant human roles, any price might seem justifiable for owning a piece of these transformative powers. Ultimately, this scenario pushes a stark choice. Invest in the technologies that are disrupting human life and work or face increasing irrelevance. This approach to investment reflects a deep anxiety about the future, where the only apparent escape is to own a part of the very force that threatens one’s economic existence.

Investment has become more passive in recent decades

Investment has become more passive in recent decades. The investment landscape has transformed dramatically over recent years. Showing a pronounced shift toward fee-based management strategies in major financial institutions. This evolution has fundamentally altered how money is managed and subsequently, the behavior of the stock market itself.

Major firms like Morgan Stanley Wealth Management, Bank of America Merrill Lynch and Wells Fargo Advisors have reported significant increases in assets managed under fee-based accounts. This shift is mirrored by the growth of registered investment advisors who largely employ fee-based strategies, representing a substantial portion of the wealth management sector in the United States. By the end of 2013, the trend toward fee-based accounts saw assets under management skyrocket to over $1.29 trillion from just $198 billion in 2005. The predominance of fee-based accounts leads to a more passive investment approach. Without the commission incentive to execute frequent transactions, advisors are more likely to focus on long-term, steady investment vehicles like mutual funds, tax-sensitive separately managed accounts and index funds. Notably, firms like Vanguard, State Street and iShares have become key players in this era, marking a significant departure from the active trading and stock picking that characterized the 1990s.

This passive investment strategy contributes to a unique phenomenon in the stock market. A constant demand for stocks that quickly buys up any drops in prices, resulting in smaller and quicker recoveries from those drops. Today’s advisors are consistently allocating more funds to equities. They buy stocks regularly, regardless of daily news, leading to a market that persistently trends upward. This new investment behavior also explains several other market dynamics. For instance, the reduced trading volume on the New York Stock Exchange is largely because most invested funds remain static, with only a fraction actively traded.

Additionally, the financial media struggles to attract viewers, as the investor community that actively trades on the New York Stock Exchange is relatively small, estimated at around 3 million people. Overall, the shift to fee-based management has not only impacted how advisors and investors approach the stock market, but also fundamentally altered the market’s behavior. It has created a bias toward buying equities, with minimal selling, fostering a market environment where every dip is viewed as a buying opportunity, thereby sustaining an upward trajectory in stock prices. This approach reflects a broader trend toward long-term, growth-oriented investment strategies, driven by the changing demographics and financial goals of investors.

Social media has amplified the role of emotions in financial decisions

Social media has amplified the role of emotions in financial decisions. In the realm of investing, emotional forces have always played a pivotal role in shaping market dynamics. Historical figures like the legendary American stock trader Jesse Livermore noted the influence of basic human emotions such as greed, fear, ignorance, and hope on market patterns, a perspective that remains valid today. But the modern investment landscape shows nuanced shifts in these emotional drivers, particularly when it comes to fear and greed.

Now, manifested as insecurity and envy. Insecurity in today’s market stems not just from the traditional fear of financial loss, but from a deeper fear of being left behind in a rapidly advancing world. This fear has been amplified by significant technological and financial shifts, including the explosive growth of cryptocurrencies, which have generated unprecedented wealth for some, intensifying feelings of being outpaced by peers. The fear of missing out has become a prevalent sentiment, influencing investment decisions and strategies. The meme have fun staying poor encapsulates this era’s anxiety, highlighting the scorn directed at those not participating in the crypto wealth creation surge. Now we come to envy, a modern twist on traditional greed.

Envy has come to heavily color the emotional landscape of the market today. Interaction on platforms like X reveals this envy, where even those profiting substantially feel compelled to see others acknowledge their success, often leading to public spats and displays of one upmanship. This environment fosters a culture where investors not only seek financial gains, but also need public validation and the perceived failure of others to enhance their own success. Insecurity and envy drive investors to take risks that may not align with sound financial principles. The visibility of others gains, particularly on social media, prompts a distorted sense of competition, pushing investors to match or exceed the returns seen by their peers, regardless of the underlying understanding or sustainability of these investments. This behavior leads to increased market volatility and personal financial risk, as decisions are driven more by emotional responses to others’ actions than by reasoned strategic planning.

In the current investment climate, managing your emotional responses is as critical as managing financial assets. The interplay of insecurity and envy necessitates a disciplined approach to investing, one that prioritizes long-term planning and rational decision-making over reactive moves spurred by the emotional currents of the market. Investors are challenged to maintain perspective amid the noise and fervor of rapid wealth creation and to adhere to investment strategies that align with their financial goals. Recognizing and mitigating the influence of these modern emotional drivers is essential for achieving sustained financial success in an increasingly interconnected and transparent global market.

Sound investment strategies rely on simplicity

Sound investment strategies rely on simplicity. When it comes to investing, simplicity plays a pivotal role, trumping complexity at every turn. Put differently, the best investment strategies are always straightforward and transparent. The allure of complex investment opportunities often entangles even the most seasoned investors.

There are many examples of this. Take the renewable energy giant SunEdison’s bankruptcy in 2016. The company’s stock plummeted from a high of $31.56 to mere cents within months, a shocking decline that affected many savvy investors. Hedge funds and renowned investors were drawn to the company’s complex structure, perceiving it as an opportunity to leverage their sophisticated analytical skills. However, this complexity, which initially seemed like a gateway to untapped wealth, ultimately proved to be their downfall. The SunEdison example underscores a broader tendency among elite investment circles to gravitate toward intricate investments.

These scenarios often involve intellectual challenges that are appealing on the surface but are fraught with hidden risks. The competitive drive among top-tier firms exacerbates this trend, leading to a herd mentality that can cloud judgment and override the caution that might otherwise guide investment decisions. Some of history’s most successful investors do the exact opposite to this. They adopt simplicity. These investors have distilled their strategies to essential principles, steering clear of the unnecessary complications that can obscure real value. They demonstrate that simplicity in investing, far from being a naive approach, is both a discipline and a strategic advantage.

The market’s complexity often seduces investors into believing that intricate strategies are superior or that simple approaches are inadequate. This mindset is continually reinforced by the financial industry’s narratives that glorify complex financial engineering. Yet time and again, the markets reveal that these complex ventures are not only hard to sustain but also vulnerable to dramatic failures.

Price signals remain the most reliable guide to picking winning investments

Price signals remain the most reliable guide to picking winning investments. No matter what investors think they know, in times of market panic or correction, there’s only one thing that matters—price. When the market becomes turbulent, everyone in the investment world essentially turns into a technician. A technician is someone who focuses solely on price movements and market behavior, ignoring the complex reasons behind these fluctuations.

This approach provides a more direct, real-time reflection of market sentiment, which is predominantly driven by the collective emotions of fear and greed among investors. Technicians hold a fundamental belief that price movements dictate news and sentiment rather than the other way around. For instance, the perception of a company’s success or failure often hinges on its stock performance rather than its operational achievements. If a company’s stock price is up, the market views it as a triumph. If it’s down, the narrative quickly shifts to doom and gloom. This perspective is evident in scenarios ranging from tech giants like Apple to emerging social media startups.

The valuation swings in these companies can lead the media in public opinion to shift dramatically, painting a picture of success or failure based on recent price trends rather than underlying fundamentals. The technician’s approach to investing is rooted in the belief that price has memory and that historical price levels can influence future market behavior. Technicians observe how previous price points attract buying or selling activity, using this information to predict how these levels may act as either support or resistance in the future. This method assumes that if nothing substantial changes in the market or the world, the same price levels that were significant before will likely be significant again. Technicians also argue that trends in the market tend to persist because investors react to news at different speeds and with varying degrees of boldness or caution. For example, in a bull market, the appetite for riskier securities grows as the uptrend continues, often culminating in a buying frenzy.

Conversely, during downturns, selling pressure intensifies as prices fall, driven by the increasing urgency to avoid losses, which makes the asset appear less desirable the lower it goes. Technicians prioritize the study of price actions and trends over traditional fundamental analysis, which might focus on financial statements or economic forecasts. They believe that understanding the actual transactions in the market, what people are buying and selling right now, is more indicative of true market conditions than historical data or predictive models. So what’s the takeaway here?

Well, as an investor, you should consider pivoting to a practical, evidence-based approach that taps into market sentiment. In other words, your focus should be on price actions and trends. This method not only underscores the importance of real-time market dynamics, but also encourages you to concentrate on current price signals. By adopting the mindset of a technician, you’ll develop a strategy that’s more attuned to the complexities of the market and be better equipped to handle its fluctuations.

Conclusion

In this summary, You Weren’t Supposed to See That by Joshua Brown, you’ve learned that automation is reshaping job security, pushing individuals to invest defensively in technology to stay economically relevant. We’re also seeing the investment landscape shifting toward fee-based management, favoring long-term growth and stability. Emotional factors like insecurity and envy are increasingly influencing investment decisions, necessitating disciplined, rational planning. And now more than ever, simplicity in investment strategies offers clarity and reduces risk, countering the allure of complex financial ventures.