What does a nice, hot, deep bath have to do with investing or trading in any financial market, whether the rand, other currencies, gold, commodities, bonds, stocks etc? More than you may think. You see, when it comes to investing, trading or exchanging in a financial market, the average person acts as if they are about to take a nice hot, relaxing bath on a winter's evening. Imagine the scene... The bath has just started to run. There is no incentive whatever to get in, so you wait (dressed) on the side as it fills up. You test the water, but mostly it is too hot for your liking – or too cold. And so you adjust the taps. When the bath is nearing that nice, inviting, full look, you do some last testing and adjustments and – finally – you get in. And immediately you feel so good as you simply lie back and soak in that rising warmth all around you. And then something feels different – the water isn't that warm anymore. So you fill it up some with some more hot water. But it doesn't stay that way... It starts cooling down. So you sink down up to your neck in the water – trying to soak up that last bit of warmth. And still it cools down…. …And still you don't get out. No, instead, you pull out the plug, and stay in the bath as the water drains away around you. And, strangely, you almost enjoy the different sensation after that nice hot bath, which is still very much in your mind’s eye. Until suddenly, when the bath is almost drained of water, you wake up to the fact that you are sitting – totally exposed and cold – in a completely empty bath. And that's when you finally get out. I am sure you can relate. Why on earth do we do this? Why get in the bath when it is full and hot? And get out when it is cold and empty? Why not get in while it is hot and filling up? And get out before it starts cooling down? Well, here's the rub – as irrational as this human behaviour may seem, our natural instinct is to approach the financial markets in exactly the same way – buying when we should be selling, and selling when we should be buying. So, what is the cure/ antidote to this syndrome? · Firstly, we need to realise that we will default to this mode of emotional behaviour unless we have an objective, informed, educated knowledge and view of the market. · Secondly, we need to know ourselves and recognise when those two villains, fear and greed, raise their heads, and to take action based on our analysis, despite how we are feeling. · And thirdly, to realise that when everyone is agreed on where a market is going, it is a clear indicator that it is likely to do just the opposite. As Warren Buffet aptly put it, “Be fearful when others are greedy and greedy when others are fearful.” For more examples of this phenomenon in the property, gold and stock markets, visit http://www. forexforecasts.co.za/go/ market-sentiment. INSERT Our natural instinct is to buy when we should be selling and sell when we should be buying. CAPTION James Paynter is the head market analyst at Dynamic Outcomes
