Panicked Times vs. Panicked Investing

TruePoint Capital

We all go through panicked times, but not all of us have to engage in panicked investing.

The markets have never seen anything like COVID-19 (coronavirus). Never before has a pandemic wreaked such devastating economic havoc as COVID-19. To say that it has crippled world economies would be an understatement.

These are panicked times marked by panicked investing. As science has proven, panicked decision-making during panicked times typically leads to bad results.

Case in point, since February 12th, the Dow has shed more than 37% of its value and is not far from matching the 50% plunge seen during the Financial Crisis between 2008 and 2010.

The economic toll exacted by COVID-19 seems grossly disproportionate to the death toll, which just crossed 16,000.

For perspective, it’s estimated that an average of 1.2 million people die a year from auto accidents. That’s an average of 3,287 per day. That means since the first cases of coronavirus were reported by the World Health Organization (WHO) on December 31st, 2019, it’s estimated that 272,821 people have died from car accidents around the world compared to just over 16,000 for COVID-19.

Panicked investing has led to bad results on the stock market, but there may be a scientific explanation:

Scientists at the University of Pittsburgh have discovered a mechanism for how anxiety may disrupt decision making. It all has to do with the prefrontal cortex (PFC), the region of the brain responsible for decision making.

By studying rats, scientists at the University of Pittsburgh discovered that anxiety had the effect of disengaging neurons in the PFC, which plays a pivotal role in executive functions that include: long-term planning, understanding rules, calculating the consequences of risk and reward, regulating emotions, problem-solving, and decision-making.

The study concluded that anxiety, in both animals and humans, appears to disrupt brain neurons in the PFC that are critical for making smart decisions.

It’s no wonder then that panicked times such as the current one dominated by COVID-19 has led to some truly poor decision making from an investing standpoint.

Before the outbreak, the U.S. economy was firing on all cylinders. The underlying fundamentals were strong with unemployment at all-time lows and consumer confidence at all-time highs.

The actual effect of the virus can only be partly to blame for the sharp drop in the stock market for actual economic output. The rest of the blame rests squarely on fear and anxiety fueled by the mainstream and social media.

So why do some investors panic and engage in panicked investing that leads to poor decisions while a small minority of investors sit back and ride out the storm?

It’s because these wealthy investors have figured how to remove the anxiety factor from their investment decision making. The way these wealthy investors deal with panicked times should serve as a blueprint for the rest of the investing public to follow.

One way wealthy investors prepare for panicked times is by minimizing the risk of falling into anxiety-inducing situations through the types of asset classes they choose to invest.

That’s why these investors gravitate towards recession-resistant alternative assets that produce cash flow even during downturns with appreciation potential – all backed by a tangible asset.

Certain segments of commercial real estate, agricultural assets, productive businesses, and energy assets fit within this class of alternative assets built to resist recessions.

Savvy investors have little to worry about if the economy hits the skids because they know their assets will continue to distribute income and appreciate. If worse comes to worst, these investors know they’ll never lose their entire investment capital because their investments are backed by tangible assets that contain an intrinsic value like buildings, land, farmland, and mineral rights.

So while anxiety drives the rest of the investing public into making poor choices and driving down the markets – wealthy investors don’t allow anxiety to take over their decision making because they’ve eliminated that anxiety from their investing equation. They are always prepared for panicked times.

Another way wealthy investors prepare for panicked times is by building a fail-safe mechanism into their investment strategy. This fail-safe mechanism is illiquidity.

Illiquidity saves investors from each other and themselves. So, even if a savvy investor felt anxiety, they would be prevented from making bad decisions like their mainstream investing counterparts because of the prohibition on sale or redemption of their investment interests until a certain period milestone has been reached.

By avoiding the public markets and investing for the long-term, savvy investors eliminate anxiety from their investing decisions, which has scientifically been proven to be a good thing.


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