Fear of Loss > Joy of Gain

According to the futures market, the S&P 500 looks to open higher today which is probably a result of the failure of Hurricane Irene to cause widespread damage. Lots of folks still don’t have power and I see downed tree limbs all over DC, yet traders were clearly worried about a much worse storm.

If you’re new to investing, this is a good time to learn the important lesson that fear in markets is more powerful than greed. In other words, the fear of a loss looms larger in a person’s mind than the joy of a gain.

Here’s a very basic way to think about it: Let’s say there are two stocks that are equal in every way. Both stocks are expected to earn $1 per share next year, but there’s one slight difference. One stock is expected to make $1 per share, plus or minus two cents per share. The other is expected to make $1 per share, plus or minus 15 cents per share.

All things being equal, the first stock will have a higher price than the second. I know that doesn’t make much sense, but that’s what happens. The fear of a loss overpowers the joy of a gain.

Last week was the first time the S&P 500 made a profit for the week since July. It looks like the index is gearing up for another run at 1,200. The recent high point was 1,204.49 which was the close on August 15th. If we break that, I think the bulls will get a lot more confident. Bloomberg writes: “Should companies meet analysts’ profit estimates, the S&P 500 must advance to about 1,790 to trade at the average multiple of 16.4 since 1954, according to data compiled by Bloomberg.”

On the Buy List, we’re also going to have Jos. A. Bank’s ($JOSB) earnings today. Wall Street’s estimate is for 68 cents per share. The stock has been creeping up lately ahead of earnings.

Posted by on August 29th, 2011 at 9:15 am

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