investor behavior

What Comes Next? Three Paths

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Psychologist Shawn Achor wrote about crisis and adversity, recurring features in both the markets and life. Stuff happens, as they say.

Achor says there are three alternate mental paths in the aftermath of crisis.
The first one leads nowhere. We simply expect the crisis conditions to continue. The second one leads downward to more trouble, a continuation of the trend. We humans do tend to believe current conditions or trends will continue.

Finding the third path is difficult when times are tough. Many people do not see it because they do not believe it exists. The third path leads from the challenging conditions to greater strength, capabilities, opportunities and success. Think of it as falling forward.

Studies show those who conceive of failure as an opportunity for growth are more likely to find the third path, and experience that growth. Others have talked about the same concept with words like resilience and grit, or more vividly, post-traumatic growth.

We see this pattern in the investment markets. Although historically the stock market has recovered sooner or later from every downturn, some investors do not recover. Those who can only see the first two paths have a hard time staying invested. If they sell out at low points, believing the crisis conditions will continue or worsen, what might have been a temporary loss becomes permanent.

By the time they see the third path, the market may have already recovered. Their diminished pool of capital can only get reinvested at higher prices, perhaps to repeat the cycle of crisis and loss.

Fortunately, here at 228 Main you clients tend to have productive attitudes toward investing. You can see the third path, which is a big advantage. If you would like to talk about this or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Dumb as a Rock?

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Haven’t we all heard the insult ‘dumb as a rock’ at one time or another? We recently came to the conclusion that there is something worse.
Sometimes people fail to act as smart as a rock.

A rock never acts rashly when presented with an unexpected situation. Nor makes impulsive decisions based on fleeting feelings. Nor changes long term strategies because of short term conditions.

No rock ever wanted to sell all investments because of that Democrat or Republican that got elected. No rock wanted to jump on the latest fad in the markets.

Perhaps striving to be as smart as a rock fits in with one of the ideas that legendary investor Charlie Munger talks about. His notion is that it is a lot more valuable to not be stupid than it is to be smart. After all, smart people may make stupid mistakes.

Do not take this the wrong way. We believe in education. We read incessantly. We are always searching for perspectives or knowledge that might give us an edge. Brains are useful. But it helps to remember, as Munger said, to avoid being stupid.

One of the nuances of being human is the possibility that we can be two things at the same time. Generally kind people might be rude. Those who tend to be rough might be gentle. And smart people might do stupid things. When we analyze opportunities or think about financial decisions, we try to not be stupid.

Clients, if you would like to talk about this or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Every Share of Stock is Owned Every Day

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Every share of stock in existence is owned every single day by somebody. But the market news often refers to “all the selling on Wall Street” on a down day, or “the buying on Wall Street” on an up day. In reality, every share sold was also bought.

This came to mind when we recently read the words of a supposed expert: “investors need to be protected from themselves.” Since “you can’t change people” then the right prescription is a 60/40 or 40/60 mix of stocks and bonds, because otherwise people would sell out at a bad time – in a down market. But every share sold gets bought! So we cannot all be selling at the same time.

The idea that nearly everyone should give up the potential returns of long term stock ownership on a large fraction of their wealth because they won’t behave properly seems wrong-headed to to us. Our actual experience with you over the years says that many people are either born with good investing instincts, or can be trained to invest effectively.

We believe you can handle the truth. Long term investing requires living with volatility, the ups and downs. This is not appropriate for your short term needs, of course, for which you need stability.

In these times when bonds pay so little, insistence on a significant allocation to a sector where returns are likely to be historically poor for many years seems short-sighted. Particularly when used to shield true long term money from normal stock market action.

Let’s be clear: our philosophy is not for everyone. History suggests that about one year in four, broad stock market averages are likely to go down. If you can’t stand that with some fraction of your wealth, our approach is not the right one for you.

Clients, if you would like to talk about this, or anything else, please email us or call.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

World’s Biggest Roller Coaster?

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The biggest roller coaster in the world is Kingda Ka, at Six Flags Great Adventure in New Jersey. Sometimes investing provides a similar experience.

We have written before about the lovely decade of the 1990s, when the major stock market averages more than tripled. When you get up close and really look at what happened, however, it looks a whole lot different. We examined the data for the S&P 500 Stock Index.

During that decade, there were 1,171 trading days when the S&P went down. The total points “lost” on those days adds up to 5,228. Put that in perspective: the decade started at just 353 points! The down days “lost” more than fourteen times the beginning value1.

Who would knowingly stick around if, on the first day of the decade, we knew that 5,228 points would be “lost” on the down days?

There is a reason we put the word “lost” in quotation marks. It might be more appropriate to speak of temporary declines rather than losses. We say this, because of what happened on the other 1,356 trading days in the decade.

On those up days, the market went up a total of 6,344 points—or more than 17 times the beginning value1. If we knew only that piece of the future at the outset, money might have flooded in.

The bottom line is, here is how we got a triple in the market: it went up 17 times its original value, and down 14 times its original value, in totally unpredictable bits and pieces of rallies and corrections. Patient people prospered.

It is hard to argue with a triple. That is a fine result. This is why we talk incessantly about the long term, long time horizons, keeping the faith, following fundamental principles, and not panicking at low points.

During the decade, how many times did 10% corrections have to be endured? 20% bear markets? Were there any 30% or 40% losses? WHO CARES? It didn’t matter to long term investors.

Clients, if you would like to talk about this—or anything else—please write or call.

Notes & References

1Standard & Poor’s 500 index, S&P Dow Jones Indices: https://us.spindices.com/indices/equity/sp-500. Accessed October 3rd, 2018.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

 

Is a Drop a Loss?

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We humans use stories about events great and small to help understand the world. One of the common stories about the stock market contributes to a great misunderstanding, however.

A market decline from some higher point in the past is often spoken of as a loss. Yet whenever the market is trading at an all-time high, every past downturn has been fully recovered. One might ask where the loss actually is.

To illustrate, the decade of the 1990’s was a good one for the broad stock market, as measured by the S&P 500 Stock Index. It more than tripled, rising from 353 points to 1,469. Yet of the 2,527 trading days of the decade, 1,171 saw a decline—a drop—in the market index.1

Those down days represent a cumulative 729% in “losses.”1

In a decade when the market tripled, how does it make sense to speak of losses during the interim? Particularly losses equal to many times the beginning level?

The market is volatile. Values fluctuate. It goes up and down. But if you have long term goals, it might pay to focus on long term results, not temporary downturns. If you invest next week’s grocery money in the stock market, then yes, a temporary downturn will result in a loss when you sell out in order to buy food. Otherwise, we would say a drop is not a loss.

Note: one should never invest next week’s grocery money in the stock market.

Our business is striving for long term results for people who share our time horizon and philosophy of investing. We talk about it every way we know how, in many venues, to reinforce effective investing attitudes and to forewarn those who lack them.

Clients, if you would like to talk about this or anything else, please email us or call.

1Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved September 18th, 2018.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

 

Pain Fades Away

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Some pundits calculate the current run-up in the stock market as the longest bull market in history. It seems many have forgotten how tumultuous and uncertain things have felt at times during the rise.

Before the rise began, a punishing drop in the market (and investment account balances) happened, from mid-2007 to spring 2009.

Then, just a couple years into the recovery, we had one of the most turbulent periods ever. In August 2011, after dropping more than 5% the week before, the Dow Jones Average dropped another 5% on Monday, August 8. This 634-point drop was partially offset by a sharp rebound on Tuesday, a 429-point gain. Wednesday reversed again, with a drop of 519 points. Thursday’s gain of 423 points ended a string of daily moves greater than 400 points, down-up-down-up.1

Since the market was much lower then, an equivalent 4% move today would be about 1,000 Dow points! Imagine that four days in a row. We lived through it.

Why did this happen? Developments developed, happenings happened, and pundits spewed punditry. It would spoil our story to detail the details. As it turns out, they don’t matter.

We’ve been asking people whether they remember this episode. Few do. Thus our conclusion: the pain is temporary.

If you do a little math with our story, you’ll note the Dow dropped more than 10% in six days1. This was alarming to those who were paying close attention. Yet from the longer-term perspective, it probably would have been a mistake to sell at any point in there.

After all, this turmoil happened during the longest bull market in history!

The next round of turmoil is always out there. When we counsel patience, it is with the long term—and a knowledge of history—in mind. Clients, if you would like to talk about this or anything else, please email us or call.

Notes & References

1Standard & Poor’s 500 index, S&P Dow Jones Indices: https://us.spindices.com/indices/equity/sp-500. Accessed September 4th, 2018.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Why Not Both?

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We keep reading a curious idea promoted by some in the financial industry. It goes like this: “Managing investor behavior is the key task for advisors, not managing investments.”

That framework assumes there is a choice between one or the other. There are two flaws in the assumption. It does not have to be an either-or deal. And some fraction of people don’t require babysitters for their natural investment behavior, which is effective.

We believe in BOTH of these roles. It may be true that raw human nature is generally counterproductive to sound investing. (Behavioral economists tend to think so.) Our theory and experience says that the attitudes and behavior of individuals can be deliberately shaped to their benefit—and ours.

What may apply as a general principle to all people does not necessarily apply to you as an individual. You have free will. And we believe people can learn.

So we spend a great deal of time and effort talking to you, and communicating about the mindsets and strategies and tactics we believe are effective. But that is only part of the job.

Legendary investor Charlie Munger said, “We wouldn’t be so rich if other people weren’t wrong so often.” By avoiding stampedes in the market, we may sidestep a poor situation that others are getting into. And by seeking the best bargains, we are looking for holdings that others may be wrong about.

In other words, two of our fundamental principles about investment management are founded in a belief that investment selection matters because people are often wrong. We see investor behavior as a creator of opportunities for our clients—not a problem to be managed. Clients, we keep saying you are special: this is why. We believe your investment behavior is exemplary.

Knowing what you own and why you own it, operating in accordance with sound principles and strategy, makes it easier to behave effectively. These things reinforce each other.

Manage behavior, or manage investments? It isn’t either-or—we need to pay attention to both. Clients, if you would like to discuss this at greater length, please email us or call.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.