Jonathan Zweig: Time to Take Stock of Recent Rally

Jonathan Zweig, WSJ columnist and literary custodian of Benjamin Graham's classic, The Intelligent Investor, warns that market conditions warrant caution from investors.

Here are some highlights:

First, distrust your emotions. Yes, it feels good to gain back some of what the market gods stole from you over the past few years. But how you feel about your portfolio today tends to be inversely related to how it makes you feel tomorrow. Weren't you euphoric back in 1999 and the beginning of 2000, when your tech stocks were soaring? (Then they crashed.) And didn't you feel flush a few years back, when the Dow was hitting 14,000 or you could make the price of your home go up just by sitting in the living room watching TV? (Then they crashed.) More important, didn't you absolutely hate your stocks in the miserable days of March 2009—at the very moment when they were about to enjoy their biggest gains in years?

Second, emotions are as contagious as pathogens. In experiments on group performance of routine tasks at Yale University, the "cheerful enthusiasm" of one member jumped to others, reducing the diversity of opinion within the group and leading the average participant to conclude that the group was performing better. Recent research even shows that positive emotion is at least as likely to spread over the Internet as it is face-to-face. Bear in mind, then, that an online thread of bullish investing posts can skew your feelings more than you might ever realize.

Third, investments don't become more attractive after prices go up. What you get out is always a function of what you pay to get in. In a speech in 1963, the great value investor Benjamin Graham warned that "a large advance in the stock market is basically a sign for caution and not a reason for confidence."

Finally, hold fast to your independence. When the investing crowd stampedes into bonds and emerging markets, as it is now, you should move with extreme caution until the herd moves on.

Zweig finishes off with this thought from William Bernstein:

"What's the personality of the most successful investors?" asks William Bernstein, a neurologist who co-manages $156 million at Efficient Frontier Advisors in Portland, Ore. "They aren't affected by other people's feelings. In fact, the most empathetic people I know are the worst investors."

Source: Time to Take Stock of the Recent Market Rallies, Jonathan Zweig,, April 3, 2010

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