“Buyers are Liars:” of Geysers and Stock Markets

Published 9:08 am Wednesday, August 26, 2020

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by Andy Millard

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Have you ever heard of Steamboat Geyser? It’s the largest geyser in the world, located in the heart of Yellowstone National Park. It can spit water and hot rocks 400 feet into the Northwest Wyoming sky.

But unlike its cousin Old Faithful, it’s unpredictable. It erupted just three times between 2005 and 2018. Then in March of 2018 it went off again—and it has erupted 112 more times in the 29 months since then.

Now, imagine that you’re a financial planner talking with a new client. At some point during the conversation, you ask about investing in stocks. Depending on the client, you might hear one of the following responses:

Client 1: “I understand that stocks are risky. But I know what I’m getting into, and I’m prepared to take the risk.”

Client 2: “Stocks are way too risky. I don’t want to lose any money.”

You might reasonably assume that Client 1 is the adventurous type, while Client 2 is more interested in security. And those assumptions might well be correct—but not necessarily. Your hypothetical client’s attitude toward risk might simply be a response to what they think is happening around them.

Back to the world’s largest geyser. When my wife and I visited Yellowstone in September of 2014, Steamboat had erupted only once in the previous eight and a half years. We had zero expectation of seeing it in action. And yet… there we were, standing in awe as a geyser that never erupted, did.

After that, nothing. No eruptions for the next three and a half years. Because human beings adapt their expectations to what they see occurring around them, Steamboat Geyser’s parking lot saw the number of cars gradually slow to a trickle.

But this year, Steamboat has been going off like crazy. If you were to spend a week in the park, you might well expect to see it. Once again, the parking lot is host to a regular flow of cars and campers.

The eruptions could stop at any time. The geyser might not erupt this week…or next week, or the next. Visitors would likely go on expecting to see it happen—for a while. If it were to go dormant for another ten years, they would gradually come to expect more dormancy—maybe even permanent dormancy.

All of this goes a long way toward explaining your pretend clients’ attitudes toward risk. Not only do we humans adjust our expectations to our most recent environment, we also have an innate tendency to project the recent past into the indefinite future. When stocks are stable and climbing, we expect the trend to continue. Conversely, during times like the Great Recession of 2008, we don’t think they will ever recover.

I’ve seen it more times than I care to count. During up markets, most of us are Client 1, deluding ourselves into thinking we have a high tolerance for risk when in fact we don’t really think there is any. In down markets, we become Client 2, unable to recognize opportunity because of an irrational fear of Armageddon.

An old stockbroker I once knew had a saying: “Buyers are liars.” It was his cynical way of describing an undeniable truth: each of us can be extraordinarily skilled at fooling ourselves.

Are you Client 1, or Client 2? Is your response to risk consistent, regardless of what form that risk takes? How is your response to risk influenced by recent events? And how sure can you be of your answers?

My own answers probably aren’t any better than yours. But simply asking the questions—and making an honest attempt to answer them—will make you a better decision-maker.

By the way, to see a spectacular video of Steamboat Geyser produced by the National Park Service, search YouTube for “Minute Out In It: Steamboat Geyser Eruption.”

Andy Millard, CFP® is a retired financial planner. He does not offer financial planning services; this column

is not intended as advice but rather education, commentary and opinion. Consult a professional advisor. If you have general questions about financial planning or investments, feel free to submit them to Andy at camillard@mac.com.