Since the ravaging of stocks, exchange traded funds (ETFs) and the overall financial markets, many still ponder the question of how and why this happened.
In a nutshell, most put the blame on two reasons. The first is merely structural, where regulators didn’t regulate and institutions failed to function like they should. The second is that Wall Street was just plain old incompetent, where traders and money managers made bets without considering the consequences, states Malcolm Gladwell of The New Yorker. Gladwell suggests that a third may be equally to blame: psychology.
According to Gladwell, the event that ignited the financial crisis – the collapse of Bear Stearns – was not caused by bad trades as much as it was caused by overconfidence or lack of overconfidence by Bear Stearns ex-CEO Jimmy Cayne. The real problem hit when Cayne preached that Bear Stearns was in good shape when the rest of Wall Street disagreed. As a result, confidence in the once powerful investment bank diminished and any lifeline that was handed out broke.
If emotions played a role in the crisis, it illustrates two things:
1. We’ve all got them. You could have an MBA from the best college in the world. You could have the best and brightest minds assembled in one room. That’s not necessarily insurance against experiencing what makes us human.
2. Quieting them takes practice and diligence. Employing an easy-to-implement strategy that you can stick to can help. We suggesting following trend lines (we use the 200-day moving average as a guide) and having a strategy to enter and exit the markets. By relying on what the market is telling you instead of your gut, rumors or your own excitement, you can give yourself the opportunity to take part in any potential long-term uptrend.
For more stories on trend following, visit our trend following category.
Kevin Grewal contributed to this article.