When stocks go down, people start blaming each other. It's always everyone (anyone!) else's fault but our own for making a bad investment, right? Behavioral Psychologists call this phenomenon regret shunning.
Why should investors care about this? Because regret shunning is symptomatic of doubt, fear, pessimism—general bearishness. Our regular readers know a great time to invest is when broad sentiment is full of negative emotions, but economic fundamentals point to good things. (This is what we've got today; a big reason for our optimistic outlook for stocks in 2007.)
Regret shunning helps pave the steps that lead markets up the "wall of worry." The amazing thing is we're into the 5th year of this bull market and still people are going after each other's throats on the regulatory front.
But regret shunning stories are not a black box for gauging sentiment. There's no question we live in a litigious society in desperate need of tort reform, and inquiries of this kind will be ongoing no matter the market environment. To be sure, scandals like Enron and WorldCom are very real transgressions. But investors should regularly take note of regret shunning stories, particularly the ones whose headlines intone a financial industry rife with crooks and liars.
A flavor of the regret shunning story is what we might term the "inquiry culture," where politicians leverage dour public sentiment by creating "panels" to inquire about suspect business practices.
Panel to Look at Conflicts in Consulting
By Gretchen Morgenson, The New York Times
Remember the days CEOs were heroes? Corporations were bastions of progress? White collar America the leaders of a brave new world? Those were the days of the end of the last bull market, circa 1999. Those days have yet to return. Today, politicians distance themselves from business and attack it where possible. This is good for stocks—it means people are still dour on business and would rather blame it for society's ills than give it credit for anything positive.
Inquires are a clue that the kind of euphoric optimism needed to kill a bull market is yet to be found. And we doubly like them because inquiries can go on for years and very seldom lead to new regulation. Inquires are almost exclusively modes of political posturing and nothing more.
These days, we even have scandals on people investigating scandals!
SEC Warns Wall St. to Look Out for Impostors
By Reuters via USA Today