We have just gone through another scary period in the financial markets. At the same time, long-term interest rates shot up almost ¾ of a percent and the stock markets tumbled close to 1,000 points on the Dow in a matter of days.
Whenever this kind of thing happens, the naysayers and gloom and doomers come out of the woodwork, flooding the newspapers and cable news and financial channels with their dire warnings of an impending market crash. They trot out nifty and convincing graphs and charts that demonstrate their expertise and proving their points about the coming crash.
I have close to 30 years of experience in the wealth management business, and even with all that history, these market pundits make such convincing cases that they can get me doubting my own experience and understanding of the markets. And if I can feel that worked up about it, I can only imagine how much fear you as a non-professional must be feeling.
So I thought I would share with you what I do to keep a cool head in the midst of people who are fearful and panicking all around me.
1) There simply is no rational reason for pessimism about our long-term future. Thomas Babington Macaulay said, “On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?”
Sure we have big problems. The human race has always had seemingly intractable problems and doubtless always will. But those problems have eventually been solved one way or another. Often, the solutions were provided by new technologies or methodologies that weren’t foreseen in advance. These solutions themselves often create entirely new problems to solve, but that is the nature of our existence.
In 1968’s book, The Population Bomb author Paul Ehrlich declared it a fantasy that then-starving India would ever feed itself. Soon afterward, new varieties of wheat were introduced and suddenly there wasn’t enough room to store all the wheat that was produced. Some towns were storing it in schools. By 1974, India’s wheat production had tripled and they became a net exporter of the grain. This cycle recurs over and over in history and there is no reason to suspect that it will stop anytime soon.
2) Remember that while capitalism, or a market economy, is far from perfect, it is the best economic system ever invented to date. Think of all the economic problems humankind has encountered in the past. Booms, busts, recessions, depressions, hyperinflation, deflation, and stagflation. Made it successfully through all those. It’s also succeeded through every kind of political system man could think up and experiment with, no matter how horrific. In the words of the old Timex watch commercials, “it takes a licking and keeps on ticking.”
For a capitalist economy to survive, it must continue to grow. There simply is no alternative. If the economy is going to continue growing, the stock markets will continue to grow also. It will not always be pretty or a pleasurable experience for the participants, yet we can be certain about the ultimate outcome.
3) Emotions are extremely toxic to investment success. Over and over, I have seen people panic and pull out of the markets when they are low and refuse to get back in until things seem better.
Everyone knows the old axiom that to be a successful investor, you have to buy low and sell high. When the local grocery store puts bread on sale, people take advantage of the low prices and stock up. But what happens when stocks go “on sale?” People get scared and run for the hills. Then, when prices are much higher, they come rushing back into the markets and buy with both fists. It’s crazy.
To be successful, then, you have to do the opposite of what the crowd is doing. Train yourself to buy when you feel most terrified, and consider lightening up on your stock holdings when you feel most confident about the future. This one simple change in your behavior will completely transform your investment results.
4) Pay no attention to those so-called Wall Street market experts, or their dire predictions. If you can’t do that, try imagining them as sitting barefoot and cross-legged in front of a crystal ball and using it to make their predictions. That’s very close to the truth. If you go back and Google the accuracy of their previous predictions, you will see that they are wrong far more often than they are right. Newsweek Economist Paul Samuelson said in 1966, “Wall Street indexes predicted none of the last five recessions.”
Despite our deep-seated need to believe that it is possible to accurately predict the short-term future direction of the financial markets, it just ain’t so. An advisor may get it right once or twice, but it always turns out that those successes are more closely tied to random chance than anything approaching expertise.
5) People in the media that I admire and will tell it to you straight include Larry Kudlow (http://www.nationalreview.com/kudlows-money-politics), Paul Sullivan of the New York Times, and several of the personal finance columnists in the Wall Street Journal, particularly Jason Zweig.