I was having lunch with my dad at his favorite restaurant, Zan's Kosher Deli in Lake Grove, New York, when we got to talking about the different ways people handle stressful situations.
My Dad-now in his late 80s-is a highly decorated Marine who served in World War II. Among other distinctions, he received the Bronze Star with a "V" for valor for his bravery in the battles of Saipan, Tinian and Iwo Jima. You might say my dad is a real expert on stress-more than 6,000 Marines died in the battle of Iwo Jima alone.
Dad retired a number of years ago from a career as a textile designer. I always thought of him as an artist and a nature lover. I never thought of him as a philosopher. But as he ages, he continues to surprise me in many ways.
As we ate our lunch and continued to discuss why some people can be so emotional under stress, while others are quite unemotional, Dad suddenly said, "Son, emotion is the enemy of reason."
And as advisors and planners, we know that is true. Fear and greed are two strong emotions that tend to cause short-term market volatility and investment mistakes. Benjamin Graham, the father of value investing, was fond of saying that "in the short term, the market is a voting machine; in the long term it's a weighing machine." In other words, people vote with their emotions in the short-term, but over the long-term a more analytical process takes shape. This analytical process permits a more productive interpretation of data or evidence.
On January 14, 2000, the Dow Jones Industrial Average Index (DJIA) hit a high of 11,722.98 as a result of what then-Federal Reserve Chairman Alan Greenspan had a few years earlier called "irrational exuberance." That's a polite way of saying "greed." Technology and telecom companies, some without actual earnings, were trading at sky-high multiples. The majority of those price run-ups occurred between 1998 and 1999.
In March 2000, rational thought began to weigh measures and compare values, and the long correction in prices began. It took almost six years for the Dow to recover from the decline and reach a new high. Does that mean people did not make money in the markets from 2000 to 2006? The answer is "no."
Any advisor who's been in the business during this decade knows that those who stayed calm and collected during the rough patches were successful. Those who panicked and sold out missed a wonderful recovery and the opportunity to significantly enhance their portfolios over the longer term. Even if they'd taken their diminished, post-correction assets and parked them in money market funds or Treasuries, they still would have lost purchasing power from 2000 to 2006. Money market funds yielded from 1% to 2% during much of that period. While inflation was also low, those who panicked lost purchasing power on an after-tax basis. But more important, they lost the opportunity to recoup their losses because the market has moved dramatically higher since the beginning of 2003.
My dad's philosophical musing reminded me of something he had told me earlier, during that three-year bear market from 2000 to 2002. Dad is not a financially savvy person and had never spoken to me about the stock market, but during those rough markets he said, "Son, you would make a good Marine officer. You're so calm and cool in stressful situations that I'd follow you into combat without question." You have to realize this must have been a really tough thing for a marine to say to a Navy guy! So I know he really meant it. And it got me thinking about how important it is for investment advisors across the country to remain unemotional when the markets become difficult and challenging. After all, it is what clients pay us for-to lead them forward, with confidence towards their financial goals while providing them with some measures of risk protection along the way.
How do we do it? First, start with information-but filter it for the real knowledge. There is too much noisy information being provided around the clock by our nation's many and diverse media outlets. Most of this information, especially when taken out of the context of a sound and specific investment philosophy, can safely be ignored. Of course, it's important that we all scan the financial, business and political news for details we might actually use about specific companies or market sectors, but that doesn't mean abandoning the course. If it did, we might change course in our client portfolios several times a day as different economic data, stock and bond market, global news and investment commentary found its way onto our computer screens and TVs in the form of news.
Of course, as advisors, it is important to key into what the influential policy makers and astute observers are saying-especially if they have been known to be influential in helping change the course of the economy and markets with their pronouncements. These folks, I've learned, may be public officials, politicians, journalists, academics, business owners and money managers. There are people who can influence the markets or catch wind of new and shifting directions that the market or economy might be taking.
As advisors, we can't survive without a global perspective. I start my day with the Wall Street Journal and London's Financial Times to get a bead on world events and how they might impact my investment philosophy and the portfolios we run for my clients. My son Steven and I read research papers written by people we respect and who have proven themselves over time. We attend meetings with these people and ask lots of questions; that way, we're able to assimilate all we have learned and draw our own conclusions.
A planning and sound investment process is the single best way to remain unemotional during stressful market fluctuations. When markets decline, especially over several months or even years, it's only natural to try to limit losses. It's very hard to sit tight. Yet, most of the time, sitting tight is the best thing to do because taking action is usually tantamount to trying to time the market. Bitter experience has shown market timing to be a losing strategy even for professional investors.
As advisors, our investment process and patience are painfully tested when markets are declining around the world. But we, and our clients, should be able to derive comfort from an intelligent pan and process that is anchored with historical perspective of the markets and human behavior. We and our clients need that plan and process to provide with the discipline, confidence and balance to remove all threat of emotional selling.
Thanks Dad! The pastrami sandwich, knish and Dr. Brown's Cream Soda were good, but the conversation was even better.
This is an excerpt from Ronald. W. Rogé's book The Banker and The Fisherman: Lessons in Life, Happiness, and Wealth for the 21st Century (Sherpa Publishing). The book was co-authored by Steven Rogé and Rosanne Rogé. They work together at the wealth management firm, R.W. Rogé & Company, Bohemia, N.Y., where Ron Rogé is the chairman and CEO.