Why do people treat their purchases on the stock market so differently than their other purchases?  

For instance, Black Friday is historically a day of excessive sales and mass purchasing – people have been known to literally fight with each other in their hunt for bargains. This is a real picture below. 

People wait in line for hours to buy goods from socks to TVs and cars since Black Friday presents the opportunity for bargain hunters to purchase items at steeply discounted prices. Perhaps the excessive force featured in the picture above is not rational, however, the decision to purchase goods during a boxing day sale is logical.  

Unlike boxing day bargainers, investors in the stock market or business market, as we like to call it, act differently. When the stock market goes on sale or is marked down (something that happens infrequently), people do the exact opposite. Instead of rushing to buy businesses that are now on sale, people act in an irrational manner and head for the doors selling off their holdings on the way.

If investors aren't headed for the doors, they may be seen lining up to buy other fixed income or loaner investments (such as bonds, GICs, etc. where investors lend money to governments or businesses)  that may eventually erode their purchasing power. This defies common sense. Historically, this 'Black Friday' type sale in the stock market brings about fear, panic, and ultimately irrational decision making. Market trends have shown that when people are most fearful, a lot of money can be made in the stock market since while businesses are “on sale” they remain a prudent, smart investment.

They key is to fight your instinct to follow the herd. People cannot let fear and the herd mentality drive decision making. The chart below* demonstrates that while there are (brief) dips in the economy, the trend over the past 90 years is clearly upwards. Equipped with this information, investors should refrain from emotional decisions and try to act logically and buy businesses when they are marked down.

 

 

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*chart above from http://www.multpl.com/s-p-500-historical-prices - This is a great site for long term charts.