I’m not a Rochester native. I’m originally from Coos Bay, Oregon – a small logging town on the southwestern coast of Oregon. (And - before you ask - No: Coos Bay is nowhere near Portland or any other city.) It would not seem like growing up in the sticks should present many advantages for burgeoning economics nerds, like myself, but I do get the occasional thrill when I notice logging-terms used in financial markets. Here’s a fun example: “skid-row”, the poor section of town, is short for skid-road – the path where lumberjacks would drag full size logs back to lumber mills for cutting.
Here’s another logging term: the whipsaw. The unusually long whipsaw was used by two-man teams, one pushing and one pulling the saw-blade into a log, with the cutting direction rapidly switching back and forth. In investing, a “whipsaw” is an event when an investment’s price – anything from a bar of gold, to an individual stock, or a mutual-fund - sharply turns down (or up!) in price and, just as sharply, turns the other direction. So, say for instance, you see that the treasury bonds are losing value rapidly while US mid-cap stocks jump, so you sell your treasury bonds and replace them with mid-cap stocks. Unfortunately, just as soon as you make the trade, mid-cap stocks get hammered while US treasury bonds quickly recover all their value. The investor locks in a ton of losses and misses the better long term investment by buying-high and selling-low. That unlucky investor has just been “whipsawed”.
So! How do you avoid being whipsawed? That’s easy. Don’t make changes in your investments based solely on short term investment returns.