Thorstein Veblen, one of our least favorite 19th century economists, was right about one thing: people will pay stupid high prices for stuff just to show off in public, gain social prestige and provoke the envy of their peers. This idea of "conspicuous consumption" was put forth in his 1899 book entitled The Theory of the Leisure Class ("Conspicuous consumption of valuable goods is a means of reputability to the gentleman of leisure").

Look no further than the new Italian luxury shoe brand Palessi for a great example.

At a recent "private launch party" at their beautiful new store in Los Angeles, very important, bleeding-edge, haute couture-obsessed fashionistas and social media influencers were introduced to the new shoe brand with all the glamorama fixings: runway show, perfect expensive lighting and bottomless champagne flutes. It worked: the feedback from the those in the know all love the new styles and said they would pay obnoxious prices for Palessi shoes.

Here’s the thing: Palessi was actually an elaborate prank pulled by Payless ShoeSource, the discount shoe retailer, to "attract new customers and change the perception that the company sells cheap, unfashionable shoes" according to a company spokesperson. Those shoes everyone at the party loved and were willing to pay top dollar for were the same shoes you can get in at your local Payless for $19.99.

Absolutely brilliant.

This notion of overpaying for something based on conspicuous consumption and group think reminds us of the just-as-insane but completely opposite value proposition associated with the stock market.

For some reason, investors tend to not buy more — and some even sell — when stock prices go down. U.S. equities, as measured by the Russell 3000 Index, are down about 14% from their previous peak in September (but only down 4% year-to-date). As a result, people are terrified and seem to be freaking out. Contrast that with the fact that people are very happy that the national average price of unleaded gas is down 20% since its peak in May. It is the complete opposite reaction compared to stocks.

What gives?

It probably has something to do with the fact that most investors are already invested in the stock market and feel the emotional pain of lower market values and fear further declines. To be successful over the long-term, an investor needs to insulate his or her behavior from emotional roller-coaster of the stock market. It doesn't hurt to buy stocks when they are on sale … and you don't need a runway show, perfect lighting and champagne!

There are two additional things that can help mitigate the emotional ride over the long-run: (1) portfolio diversification — owning other asset classes that zig when equities zag; and (2) a thoughtful financial plan, based on conservative assumptions, that allows for normal market volatility while getting you to your goals.


Contact Russell Moenich to learn more about this topic.
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