The other day, my investment advisor sent along a grimly apt graph from an AIM Funds Management Inc. presentation describing the emotional cycle of investors as they ride — and bungle — the investment cycle.

Feelings like “thrill” and “excitement” accompany the market’s rise, peaking with “euphoria.” The presentation notes this is also the “point of maximum financial risk.” Then, the market’s slide sets in. I nearly spewed my coffee at the barrage of negative emotions listed: “panic, capitulation, despondency.” This explains why so many buy high and sell low.

With the news media churning out daily tales of gasoline-pricing doom, plus a barrage of dubious coping strategies, it struck me that there are powerful parallels in the psychology of these separate pricing dynamics. The emotions from the graph — denial, fear, anxiety — are similar. So are the associated behaviours. There’s the crushing peer pressure to match your responses to social trends. Then, the conformism itself exacerbates consumers’ irrationality. Trends accelerate and damages compound in a loop of overreaction generating self-destructive decisions. Finally, there’s countercyclical opportunity — taken by few.

The capital markets’ rises and falls match the inverse cycle in fuel markets: first, falling (or flat) prices, which then soar. In the first phase, we have mass insouciance — record sales of SUVs and Chrysler 300Ms; people commuting solo in Yukon XLs or Ford Excursions — and nobody even glancing at the gas pump. That parallels stupid equity buys, exaggerated faith in market momentum and throwing value out the window. Pump prices may be cheap or capital markets soaring, but, in both cases, it’s careless to forgo opportunities to optimize your dollars.

Today, people are going beyond the rational choices they adopt when it comes to saving money on fuel, such as commuting in their more fuel-efficient vehicle, combining separate trips to big-box retailers or ensuring they car pool on recreational day trips. Instead, irrational signs of desperation, panic and capitulation are everywhere. They’re selling seemingly fuel-wasting items just as capital values are plunging — willingly losing $10,000 in dumping a big vehicle to save $1,000 a year in gasoline. Or cancelling the family’s annual driving holiday to save $400 on fuel and opting for some $5,000 destination package. It’s analogous to selling stocks in desperation, sloppily tuned stop-loss orders and ill-timed moves into or out of exchange-traded funds.

Doomsayers flog a false dichotomy in demanding everyone dump current vehicles for a Toyota Prius. Many Canadian families have two or more vehicles, so it’s not a choice between a monster diesel truck and a Smart Car. You can have both. Commuting and shopping with a small car can save more than enough to enjoy the bigger vehicle when it’s needed, such as hauling lumber or taking the family on a driving trip. You avoid massive losses on ill-timed sales while maintaining the enjoyable bigger vehicle. The false dichotomy is reminiscent of investment managers who insist it has to be all ETFs and no stock-picking, or that everything should be invested abroad. What’s wrong with a blended approach?

The current irrational mass phenomena driving these exaggerated effects should create countercyclical opportunities. Thousands switching to public transit might lower downtown parking rates enough to offset higher vehicle costs. Tourism attractions that depend on drive-in traffic may start offering major deals; that goes double for remote destinations. Larger vehicles are selling at huge discounts — enough for years’ worth of fuel. If you already have one, park it at a buddy’s acreage rather than selling into a terrible market. Look for real estate deals, such as remote vacation properties. Values among outlying U.S. subdivisions are falling sharply as homeowners herd themselves back into city cores.

Don’t panic and don’t despair. When it comes to your gas tank, stay rational and think like a countercyclical investor. IE


More of George Koch’s writing may be found atwww.drjandmrk.com.