The Tsunami that Never Came...

photo by jervetson

Last week my wife and I were in Maui. We got a call about 7:00 a.m. and were informed by a nervous voice that a tsunami was going to hit the island later that morning. We were told that since we were on the 4th floor of a beach-front resort we would have the option to stay or leave. Everyone on the second floor and lower was being evacuated.

So we had to decide whether or not to stay. They told us that since we were on the upper floor we would likely be safe from the wave. Then they added, as long as it doesn't knock the building down. Finally, they added that we "should" be okay since the building was only three years old and was built to higher standards.

So we decided to stay. My wife suggested that we at least move down to the basement for protection. I told her I didn't think that was the best idea.

The wave was supposed to hit at 11:05 a.m. We went out to our balcony to watch the tsunami hit. We could see hundreds of worried looking people that had been evacuated to the tops of their buildings. Out in the ocean the whales were extremely active, blowing and jumping out of the water.

The tsunami did not show up at 11:05. After about half hour I started flipping through the TV channels. All the local channels were in a frenzy reporting anything that seemed like it might be related to the incoming tsunami. The national channels on the mainland made it sound even worse.

We waited and then waited some more. We were stuck at our condo because all of the roads were closed. The short version of the story is that the tsunami never came. Just like the doomsday swine flu never really did much last winter, or the widely advertised Y2K disaster that never occurred.

The tsunami experience reminded me of what we see all the time in the market. Rumors are spread by the media, and those rumors drive investors' emotions, which cause people to go into a buying frenzy. Sometimes it works the other way, and the rumors push people into a selling frenzy. More often than not, what has been rumored never occurs. But it does create a lot of drama.

The moral of the story is that successful traders don't make their decisions based on rumors. Even more important is that they don't act on emotion. Both are toxic to successful trading. At Paragon Wealth Management we invest using quantitative models, which are designed to remove emotion from the investing process.

Paragon Wealth Management is a provider of managed portfolios for individuals and institutions.  Although the information included in this report has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy.  All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice.  This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.  Past performance is not a guarantee of future results.