Moderation In All Things, Including Investing: Financial Advisors' Daily Digest
Summary
- Jim Sloan grapples with "the hardest question" he has grappled with in his life as an investor.
- John Cochrane distills the major reasons why tariffs are bad.
- ETFguide: 3 strategies for managing higher volatility.
In what is an investment tour-de-force, a must read, required reading and every other cliché I can think of, Jim Sloan's article "The Hardest Question" is one that you should not fail to grapple with. The fact that I have an easy answer to his hardest question should not dissuade you from doing so. Here's his question:
Which is the model of the world with which we should align our lives? Is the normal thing a pleasant advance of freedom and prosperity punctuated here and there with some bad stuff, or is the normal thing much darker - a series of crises to which pleasant times provide temporary relief?"
Sloan compellingly illustrates his struggle with this dilemma, describing both the march of progress Americans consider their birthright, a viewpoint for which he summons Warren Buffett as spokesman, and the darker side which he depicts through a friend he calls Meyer, who fled the prosperous lifestyle he enjoyed in Vienna, while the rest of his family waited for things to "blow over." Tragically, the only thing blowing was their ashes over the crematoria to which every one of them was dispatched.
I give Sloan tremendous credit for asking this question. I don't think it comes naturally to Americans, whose blessed history has known mainly peace and prosperity - may this trend ever continue. The question is even more remarkable for someone who practiced as a financial advisor, as it is almost an industry requirement to give voice to the idea that stocks return between 6.5% and 7% after inflation for the past 200 years.
That is enormously impressive, and its impact is imprinted on everyone living in a comfortable home in a leafy, green suburb or those whose city vibe includes the beat of American commerce in full motion. But as regular readers may surmise, I'm with the perspective represented by Meyer in this important investor debate - and not because I'm a pessimist. My nature inclines toward optimism, but I have trained myself to view the world realistically.
As a student of history, I cannot assume that past performance will be replicated. To this, the industry professionals protest that history teaches precisely otherwise: Again, 6.5%-plus for more than 200 years! But is that really so? And if you bought the S&P 500 - that is, the Signa & Pauperibus's 500 (I made this up) top stocks before the Sack of Rome, how would that have worked out? Even having diversified into Visigoth and Vandal stocks would likely not have helped, since the Barbarians were not as enterprising as the Romans.
Please do not get me wrong: I am not predicting the decline and fall of the U.S., long may she prosper. I am saying that 200 years is a blip in the hourglass of time and that our own lives are less stable than we imagine - in other words, that "normalcy" is an illusion. The average American lives to age 79, but we all know of people who passed on well outside of that range. I would bet that a large proportion of readers at one time or another escaped with their own lives - maybe from a near collision on the freeway.
And that brings us back to Meyer, who did manage to escape with his life. As Sloan puts it:
Meyer's traits have a lesson for investors of course. Doing the correct and rational thing seems easy and obvious, but clearly it isn't. Most people don't. Can't."
He's right. Most people simply don't. The S&P 500 has delivered impressive returns over the decades, and back-tested, centuries, but there is plenty of research indicating that investors' returns fall far short of the benchmark index because they buy and sell at the wrong times. That is because things happen that don't seem "normal" to them - for example, the last market crisis where it really seemed like the market fall was correctly reflecting an economy that was in freefall. If large institutions were packaging toxic securities that were spreading contagion and institutions as large as AIG needed to borrow $85 billion to avoid bankruptcy, it could seem perfectly rational to get out of the market. Its eventual recovery was by no means assured - the government used every trick in the book, and then some, to prop it up and it worked, but some of those tricks may not be available or credible the next time.
Again, none of this is to say that disaster is around the corner. It is to say that adaptability is a critical survival skill for investing and life in general. That includes the ability to distance yourself from whatever goose is laying golden eggs - which today would be the U.S. stock market. I also have a friend whose father left Vienna in the nick of time, leaving behind a tremendous fortune. I think they owned department stores in the Austrian capital. My friend's Dad grew up poor in America before reconstituting their fabulous wealth through a successful business, ample real estate holdings, and lots of cash. I think this friend's Dad probably knows in his gut that, though he became rich through his business and property, sometimes a person needs to leave that stuff behind. Indeed, in bad times, such assets tend more to tie you down while your "dead-weight" cash provides you options. And so it is that the easy answer to the hardest question is to prepare for prosperity and exigency simultaneously - the former through risk-based investing in stocks and real estate and the latter through large cash holdings.
If you search the annals of history - be that world history or your own family history - you will find that folks that ended up with nothing had at one time amassed a lot. Some event or crisis "ruined" them, but if you look at the details, they tied their fate to some risky enterprise, whether that was the stock market in 1929 or living in Europe in 1939. We all do and will face adversity. Surviving it intact requires a realistic response to risk that is composed of two key elements: One is not to be a sitting duck when life takes it shots. The other is the courage to invest, exemplified by Sloan's friend Meyer and my friend's Dad who grabbed opportunity with both hands despite the calamities they faced.
Please share your thoughts on this issue in our comments section. Meanwhile, below please find links to other advisor-related content on today's Seeking Alpha.
- Allianz Global Investors discusses the economics of populism.
- BlackRock looks at the market implications of the Italian elections.
- John Cochrane distills the major reasons why tariffs are bad.
- ETFguide: 3 strategies for managing higher volatility.
- Franklin Templeton Investments says it's not time to squeeze the breaks on Indian equities.
- Tipswatch: What TIPS investors need to know about inflation breakeven points.
- For more content geared to FAs, visit the Financial Advisor Center.
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Comments (6)
Optimism and pessimism are merely emotional reactions to cold, hard reality. Emotional rather than rational reactions to changes are generally seen as the wrong way to go. The only way to go is to face reality head on and keep your head.The other part of the article that I found interesting was the shift from large scale changes in the the world (be that financial or otherwise) to the changes that apply to an individual. This is always the issue, large populations can, to a degree, be modeled, individual circumstances not so much. Bob
What a delightful tale and so beautifully written. Seriously, I will look it up again much later to seek how to improve my ability to allocate and properly deal with life’s issues and challenges.Admittedly I am in a fog. But so far I have decided not to move to Vienna.
I might visit, but thanks for pointing out the option. I checked my family tree and found out there is no problem. Most never had any wealth to lose, so that shouldn’t be any problem. Low volitility consistently middle class. No poverty YET, but I am
working on avoiding that.
Keep up the great work and eventually I will understand that risk is always there.
I really enjoyed your article. You have a gift.
