When you see it, it's too late
12 June 2017 | Tania Allerton
According to the Red Cross website on tsunami preparedness, if you can see the wave coming you're too close for safety.
Something similar might be said of investment markets. If you can see what's happening, it's almost certainly too late to do anything about it.
We have a tendency to personify markets, to talk about the market doing this or doing that. But of course, the market is not a person. It doesn't make decisions. And neither does it grow incrementally, like a tree. It is not a person and neither is it an organic entity.
A market is an aggregation of the actions of individuals. In the case of a market such as the London Stock Exchange, the number of individuals participating at any one time might be scores of thousands. Each of these individuals is driven by his or her own agenda, by all kinds of ideas, insights, hopes, needs and desires.
Most of the time, the aggregation of these thousands of agendas will balance each other out, so that there is only a small movement up or down for the market as a whole. But sometimes, an idea will catch hold and spread. The market will move dramatically.
According to Malcolm Gladwell, author of The Tipping Point, ideas spread much like a virus, or indeed like rumours. They start small. They attach to 'influencers'. They become increasingly 'sticky'. Eventually there comes a tipping point, and the idea becomes established and starts to spread rapidly.
Of course, sometimes ideas reach a tipping point and become massive. Sometimes they just fade out. Which will it be? According to Mr Gladwell, epidemics are highly sensitive to the environment, so that their course is extremely difficult to predict.
Very few investors have a talent for predicting tipping points. For most of us, staying invested in an appropriately balanced and diversified portfolio will be the best course. By the time we see the wave, it may be too late.
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