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Perhaps the greatest thing about free markets is that the market eventually and always arrives at a price which represents the intrinsic value of an asset. This ensures that in the long-run money and capital are allocated efficiently.

However, as a matter of fact and history, free markets are prone to excessive speculation, a herd mentality, and price bubbles.

If you can figure out by how much the current market price of an asset or security varies from its true intrinsic value before the market figures that out, you can become very wealthy.

But, beware, as the saying goes, markets can remain irrational longer than you can remain solvent.

There is an immense amount of information which is continuously processed by markets and embedded in market pricing.

Interestingly, like no other time in recent history is the same information being viewed so differently by different people. Surveys of consumer sentiment show a huge gap in a person’s view of the economic future contingent upon their political leanings and affiliation.

Some of the divergence in views about the future is surely the result of emotion.

There is no room for emotion in investment, portfolio, or risk management. Rather than subject your portfolio to your own emotions, it is far better to gain from others’ emotional decisions.

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As markets fluctuate over the next several months based upon the way things play out in Washington, DC, ask yourself if your view of markets is being tainted by your emotions. Ask yourself how much markets are being impacted by headlines in the financial and political press which generate emotional reactions.

The author suspects that markets are currently prone to a great deal of emotional decision making and herd mentality. Investors on both ends of the political spectrum are extremely passionate about their views. They are anxious to justify their views through investment decisions.

Some of this was evident in market movements earlier this week. Markets gyrated based on a seemingly endless number of headlines surrounding President Trump. No one could honestly decipher what was completely true, just hearsay, or completely false.

In conclusion, the author recommends using a top-down macro approach to investment decisions in the current economic and market environment. If you feel the future looks brighter, invest that way; if you feel differently, invest that way. In either case do not get caught up in emotional decision making. Over time, as the endless stream of news headlines are or are not substantiated, asset prices will move toward their true intrinsic value.

Barry Nielsen has worked in capital markets for over 20 years with a focus on fixed income portfolio and risk management. He has an MBA from George Mason University and holds the Chartered Financial Analyst designation. He currently works for Opportunity Bank of Montana.


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