Are Hot Air Balloons an Adventure or an Ordeal?

If you were to do an online search for the top ten fears/phobias that people have, nearly every list contains two that relate to a similar thing.  One of the phobias is almost always near the top of the list and that is the fear of heights.  Usually not much farther down the list is the more specific fear of flying.  In other words, there’s something about human nature that has a fear of being too far off the ground.

Most people would think that these phobias are restricted to physical heights, but it would also seem that people can become afraid of emotional ‘highs’; that is, things going too well from an emotional standpoint.  This seems to make no sense at first because, after all, isn’t one of the primary motivations of people world-wide to seek to have better lives:  better relationships, better health, better income, and so forth?

Yet we have sayings for when things seem to be going well.  “What goes up must come down.”  “If it seems too good to be true, it probably is.”  “You’d better enjoy this while it lasts.”  It’s as though we get suspicious when things go well, especially if that means really well and/or for a really long time.  It’s at this point when some people start to make assumptions and can do some really stupid things out of fear, like trying to beat a good thing ‘to the punch’ before it can harm them if it goes bad.  It’s like we want to control the outcome before it can control us.

One area where this fear of a good thing plays out to a large degree is when it comes to investing.  Certainly the primary goal of any investor – whether in stocks, ETFs mutual funds, real estate, and so forth – is to end up with more money than one started with.  But a funny thing starts to happen to most investors when they are invested in something that reaches a point where their return gets high:  more often than not, they start to get nervous.

Oddly enough, it’s as though the one thing that investors want the most is also one of the things they fear the most:  their investment rising to new highs.

Whether an individual company’s stock or an entire industry rises to new and incredible highs, there comes a point where first a few and then many short-sighted investors jump ship and sell whatever they’ve put into it.  The fear of heights comes into play emotionally and they do whatever they can to avoid a potential fall.

This fear of a rising return on one’s investment can be likened to being in a hot air balloon.  At first, there’s the nervous anticipation at ground level, then perhaps more nerves after first leaving the ground and later exhilaration as it rises higher above it.  But if the balloon was to continue to rise to the point where it seemed scary, the people riding in the balloon would inevitably start to think of all the things that could go wrong.  It might even get to the point where they fearfully demand that the ballon pilot start bringing it back closer to the ground.

Oddly enough, it’s as though the one thing that investors want the most is also one of the things they fear the most:  their investment rising to new highs.

So the fear of a rising return on an investment is like a hot air balloon to many investors.  Instead of viewing it as an adventure, they seem to look at it as an ordeal with the perspective that the higher it goes, the farther it can fall.

It would seem as though their fears are based on the many examples of market crashes that have happened, particularly throughout the last century, whether it be stock markets or housing markets or any other place where people hoped to get a return on their money.

But if there is one common characteristic of nearly all of these crashes, it is the fact that before they crashed the markets rose just as dramatically and there was almost a mob mentality going on.  Nobody wanted to miss out on the rise to the top.  It was as though each run-up was like a herd of sheep storming up one side of a hill and the crash was all of them falling off the cliff that nobody saw on the other side.  And by the time they did, it was too late because they were rushing headlong with reckless abandon, oblivious to the warning signs.

Or to use the balloon analogy, it’s as though the passengers urged the pilot to use up the fuel too quickly, causing the balloon to run out of air altogether.

Unfortunately, these experiences have scared people into thinking that this is the only reality to investing, that no matter what you put in, the market will eventually crash and so you need to get out before it does.  That there is no normal or easy-does-it, only one extreme or the other.

Contrast this mentality with a rather unusual breed of investors, the small minority, who see rising returns in their investments as a good thing, something to not fear or be wary of.  These are the long-term investors, or the “buy and hold” investors.  They don’t just buy and hold anything; they buy stock in only the best of the best companies and then hold on no matter what because they know that these companies can weather the worst economic storms and come out the other side even stronger and better than before.  They don’t buy the hyped-up stocks or buy in hyped-up markets, but they make their decisions carefully and not in a panic.

Instead of getting nervous when returns in their investments start to multiply, they realize that by holding on through thick and thin to this point, even a severe market crash might only wipe out a small percentage of their returns.

For example, if one of them bought a stock that has now tripled in value, say from $30 per share to $90, and a market crash saw that stock lose 50 percent of its value at its worst point before it started to rebound (as a good company’s stock always does), then the $45 per share is still 50 percent above what he bought it at!

The investors with a short-term mindset – what this blog has referred to as “gamblers” and not true investors – nervous about owning a stock that happens to begin a steady climb, probably will never see even a double return because they’ll sell well before then.  The fear of losing what they’ve gained will overtake them sooner rather than later and they’ll likely jump out of the ‘balloon’ after a rise of only a few percent.

Unfortunately, this sort of investor makes up the vast majority, which means that the majority of people who’ve “dabbled” in stocks either end up having a terrible loss at some point due to panicking – selling at a low instead of holding on for the recovery – or only a marginal loss or gain, thus giving outsiders the perception that the stock market is a losing venture no matter who invests into it.

The other characteristic of the long-term investor is that crashes are seen as a good thing, not a bad thing.  Instead of selling their stock holdings when everybody else panics and sells, they instead act like a bunch of Black Friday shoppers, bursting into the market and snatching up all the incredible deals while they can.

Do a little experiment.  Look at the stock price charts of the most popular and/or biggest and strongest companies of the past twenty to thirty years after the crashes of 2001 and 2008.  Not the bad (i.e. poorly managed) companies that had so much debt going in that they couldn’t possibly survive, but the good companies, the ones that had a lot of cash stashed away to weather the storm, the ones that the smart investors kept an eye on because of their dominant industry positions and financial strength.

Look at what happened to their stock prices in the two years following both crashes compared to the bad companies:  more often than not, the stock price of the good companies had a much quicker rebound and in several cases their prices moved higher than they had been before the crash, sometimes within only a few months of that crash, never to look back.

Who was responsible for these quick rebounds?  The long-term investors, the “smart money” scooping up all the bargains!  They were the ones laughing at how people could possibly ditch their shares in the Nikes and Apples and Starbucks’ and Disneys of the stock market, to state but a few examples, thinking somehow that those companies could never possibly rebound.  Did they think that people wouldn’t buy shoes or computers or drink coffee or watch movies during the worst of times?  Even if people did these things less for a time, at least the companies providing them survived to see the better days that inevitably came and will always come.  The only things that didn’t survive were the resolve and the staying power of the weakest-minded investors, the gamblers.

So the long-term investors not only held onto their favorite companies during the storm, but they swooped down to pick up more shares when prices were sent lower.  Also, they scooped up shares in companies they hadn’t yet owned shares in that they had been keeping an eye on now that their prices were a lot more reasonable.

The point of all this is to get you to consider how you will react the next time you own a stock that happens to start rising in value, especially to new and incredible highs.  First, consider the underlying factors of this rise:  hype not based on any substance, or the result of a company’s well thought-out goals and plans coming together?  If the latter, what do you have to be afraid of if that company’s stock price rises to heights never before seen?  If your returns reach the point of starting to multiply?  Will you even hold on that long?

Most importantly, will you see this as an adventure or an ordeal?  That is, will you wonder about what great things might lie ahead or instead constantly worry about what bad things might happen as the ‘balloon’ rises ever higher?

How you live out your answers to these questions could eventually cost you thousands, if not tens or even hundreds of thousands of dollars, perhaps even more.

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