Self fulfilling prophecy

'If men define situations as real, they are real in their consequences.' William Isaac Thomas (1863-1947) We have all heard of the 4 minute mile. The challenge to break the time was rued with the notion it was impossible. The current world record set by Haag of Sweden in 1945. The concept of running a mile sub 4 minutes was met with harsh speculation and the likely possibility of death. The event took place on the 6th of May, 1954 when the young Roger Bannister broke a record that stood for nearly a decade. The self fulfilling prophecy of not being able to run a mile in under 4 minutes had been broken. With it, the idea of limitations and possibilities were gone. Just 46 days later on 21 June in Turku, Finland, The record was broken yet again. How does this translate to investing? When we preset limitations in our mind we typically adhere to them. In life when we tell ourselves that something is impossible it typically becomes just that. On the other hand when we deal with investing fundamental and technical analysis play a major role in driving the investor to the right investments. Financial analysts can sway a market in favor of a stock or bond by simply suggesting its possibility of growth. On the other side, investors can be drawn from the market equally as fast when news of a negative situation or downgrade has been published. The “herd mentality” creates a self fulfilling prophecy of up or down movements in investments based on nothing more than behavior. Never in the history of investing has the transfer of information been so liquid and timely. Only 20 years ago investors would subscribe to the Wall Street Journal (print edition) to look at hot stocks or ideas that looked impressive for future investments. Only a select few had access to real time information and were able to act upon it in order to be “in front of the herd”. Now when major news hits, we have access to it in an instant. Information about companies making earnings or being downgraded have near immediate impact. It’s no longer a Herd but more like a raging torrent of tidal magnitude. An example of this is the recent scrutiny that Moody’s came under due to slow reporting on sovereign debt. The problem- What would happen if Moody’s downgraded a sovereign country’s debt? Take it from the coveted AAA rating to a junk bond status? Regardless of the severity of the downgrade we could see a mass exodus away from the investment. Creating a liquidity crisis that ultimately creates the demise of the investment in question. The downgrade of a sovereign debt could create a slippery slope of liquidation and further volatility. In light of this problem does Moody’s have a place in the modern investing world? Do analysts yield the same control and power? What can be done to minimize the emotional impact on the market if anything? I look forward to your thoughts.

Gill Capital.