Investment Strat: Learn from the Shoe Store Analogy

April 25, 2024

The Shoe Store Analogy

Well, it looks like volatility is back. The second week in April proved to be the “worst” week for the S&P 500 since October of 2023. The media outlets were quick to inform us that it was once again a time to be fearful. If you sense sarcasm in my words, you would be correct. The media’s goal is to engage you through the commercial break or hope you scroll to the nearest “click bait” article on the website; to “entertain and inform” (i.e., influence), not advise.

The combination of signs of re-igniting inflation and frightening global macro concerns are the most recent causes for turmoil. Mr. Market felt the need to give back some of those gains from the most recent period of superior performance, this is what he does. I have known him and studied his personality for 35 years, nothing he does really shocks me anymore. As you are reading this, “the market” may have gotten worse, recovered or stayed the same, as usual short term is anyone’s guess.

I started to field calls asking, “should we sell everything now that the market is down?” from anxious individuals suffering from the behavioral urge to buy during rising markets and to sell during declining markets. A phenomenon that is well known and believed to be the primary reason the self-directed investor underperforms their benchmark return. We all understand how panic and greed rule when you are dealing with your own money. This reminded me of the Shoe Store Analogy.

If I could own a shoe store with this same client behavior, I would be the richest shoe store owner ever...EVER!!  If today I put a sign out advertising, “This week only! Inventory reduction, 20-30% off on my entire inventory of shoes!”, nobody would even come in; my parking lot would be empty.

Conversely if I advertised that “I have just raised the prices on all my shoes to ridiculously high record prices, do not miss this once in a lifetime chance!” The shoes would “fly” off the shelf, everyone would want to buy shoes; I would make a fortune. Buy high, sell low, the natural survival instinct reaction when we let emotions drive our investment decisions.

 The moral of the story is to always remember that in the short run investment markets are not always rational. Trying to time the market is a fool’s errand and what really matters is having a well-diversified mix of asset classes that can weather Mr. Market’s sometimes violent mood swings.