Some years ago, I had lunch with Bob Brimmer, an old friend and veteran adviser from Cape Cod. We chatted about how people’s behavior as investors is often less rational than their behavior in most other areas where money is involved. Bob gave an example, citing what we now refer to as the tuna fish principle.
Let’s say a can of tuna fish normally sells for $1.50. If the price soars to $5 a can, very few people will be buyers. But if the price plunges to 50 cents a can, it will sell out almost immediately.
Yet with stock market investing, people do the exact opposite. When prices drop, the last thing they are willing to do is buy, even though it’s probably the best possible time to get on board. And (you guessed it!), as prices go higher, that is when they want to buy. This is a sure formula for disappointment.
Now that almost two and a half months have passed since March 23rd, what seems to have been the recent market bottom, it’s easy to remember widespread investor panic prompted by the rapid onset of the pandemic. About 11 years earlier, there was a similar wave of fear as the worldwide banking system barely escaped shutting down.
Both times, extreme fear brought extremely good value. Wall Streeters gauge fear by what’s known as the VIX -- the volatility index -- which can be googled easily at any time.
When fear seems to be everywhere, the VIX may spike to 40 or higher. That’s often a good time to buy. Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.”
When investor confidence gets high, the VIX is typically somewhere in the teens. At the moment, it’s in the mid-20s.
If we apply the principle now, the price of tuna fish is rising and folks seem even more interested in buying. Go figure! Sound advice would be to stock up when the price is lower.
N. Russell Wayne, CFP®