Great Investors are Grownups

By |2018-12-20T16:24:33-04:00June 22nd, 2018|Blog, Great Investors Series|

“Our clients, as never before in my long experience, are being water-boarded with negativity 24/7/365 by the financial media, whose only interest is in having you click on it.”
– Nick Murray

In last month’s article, we shared a new way to think about the “real” risk of investing. This week we discuss a critical skill for the great investor to develop: Investing like a Grownup.

Financial Pornography

For anyone who regularly reads our regular articles, it is no mystery how we feel about the financial media. In our opinion, the media and popular culture have a vested interest in publishing “fear based” content, which is often exaggerated or inaccurate, in order to sell newspapers. The sensationalism of this media has become so over-the-top that we have come to refer to it as Financial Pornography.

This week I was sent a link to an article titled “The Myths of Stocks for The Long Run”. Essentially, the article attempts to scare investors out of the idea that owning stocks over a long period of time can be a rewarding strategy. The primary “proof point” of the article is the fact that there have been certain periods in history when equity prices declined, and took years to recover.

The author attempts to prove this point visually, by using a series of charts which depict the total return of the S&P 500 going all the way back to the year 1900. The charts demonstrate the fact that, although the S&P 500 has multiplied an investor’s capital over 200 times over that period, there were 4 occasions over that period when the equity market hit a temporary “top”, which took multiple years to recover.

I must admit I got a good chuckle from this chart.

It is intended as evidence against an asset class which turned a regular monthly investment of $1,000 into over $4.1 million, simply because it is possible to look back in time and “cherry pick” four days out of 118 years when an unlucky investor might have invested her capital at a market top, and been forced to wait a number of years until their capital recovered.

Constant Waterboarding

We have written in the past on many occasions of the importance of understanding the influence of the financial media on your emotions, and temperament as an investor. It is no secret that fear based media sells better, and the financial media certainly embraces the idea that “if it bleeds, it leads”.

With the rise in internet and mobile communications, the influence of the financial media has only become more intense, because there are now so many ways in which the media can bombard us with these negative messages – even through our phones! As author Nick Murray suggests, in reflecting on his experience with the financial media over a 50 year career,

Our clients, as never before in my long experience, are being water-boarded with negativity 24/7/365 by the financial media, whose only interest is in having you click on it.

As investors, we must be extremely vigilant of the impact of this relentless negative media sensationalism on our emotions, and our investing decisions. If we are not careful, we may slowly begin to lose our consciousness of this negative bias, and it may begin to gradually wear us down, distracting our long term focus, patience and discipline. We are at risk of allowing this constant stream of negativity to permeate our thinking, and to start actually believing it. Worse yet, we may begin to think that maybe we need to do something about it, because if we don’t, we will not only feel the pain of losing our money, but we will also feel stupid for not heeding all of these warnings

Whenever I am asked by friends and clients to “read and rebut” this kind of financial media, the more I know that the waterboarding is having an effect. This is part of our job description and mission here at Concentus, to remind you that the media is deliberately trying to scare you. Don’t let them.

Being a Grownup

Our feelings about the financial media should come as no surprise to anyone who reads our regular commentary. However, the real point of this article is to act as a reminder of a fact that the authors of the article referenced above seem to totally ignore, which is that being a grownup is a prerequisite to being a successful equity investor.

The facts of history are that the S&P 500 hit a low point of 13.6 roughly one lifetime ago, in 1946, and today it is trading at roughly 2,800. Ignoring dividends, that is a return of over 200 times your money, or just about 10% per year on average. There have also been 14 occasions over that period when the S&P 500 has temporarily declined by 20% or worse, and in 2008 even went down by 57% before recovering. In some of those cases, it took 5 years or even longer to “break even” from the bear market decline.

Those are the facts of history. Being a grownup means accepting that there are no facts about the future.

As an equity investor, there is no guarantee that the next huge bear market will not start tomorrow. There is no certainty that the next huge bear market will not take stock prices down much more than 57%. There is no certainty that it will recover in 5 or 10 years, or that it will actually ever recover at all. In fact, the words “equities” and “certainty” can never be used in the same sentence.

If we wish to own an asset class that has the potential to increase by over 200 times in a lifetime, or produce a double digit annual return, we must also have a healthy and mature tolerance for uncertainty. Return and uncertainty come hand in hand – if you wish to invest with certainty, you must accept a lower return, and if you want to earn a double digit return, you must accept uncertainty. Thinking that it can, or should be any different is simply childish and naïve. There is no “magic formula” which can provide return with no volatility.

There are two reasons reasons that articles such as “The Myths of Stocks for The Long Run” can be so harmful to investors. We explored the first reason in the section above – which is that content like this makes people doubt the long-term compounding power of owning shares of great companies. The second is that authors of this kind of material are selling a different kind of “myth”: the idea that there exists some kind of magic investing formula that might enable investors to achieve the holy grail of equity returns, without the risk of equity volatility. A formula that presumably the author exclusively knows how to deliver.

Our most regrettable investing mistakes happen when we are taken by surprise, we are struck with a reality we weren’t prepared for, and our emotional reaction hampers our ability to think clearly. Investors who do not develop a grown up and mature acceptance of volatility, and who buy into the “myth” of investment return without risk, are the most likely to be caught unprepared when volatility strikes. They are likely to react emotionally: they feel cheated, angry, and scared. So they throw up their hands, and sell their equity portfolios, usually somewhere near the bottom.

To become successful equity investors, we must develop a mature and “grown up” acceptance of investment volatility. The equity market makes us no promises, and offers us no certainty. But it has also offered wonderful rewards to those with the grownup temperament to earn them.

Having a Plan

The very best investors have a disciplined approach to making portfolio decisions, and always stick to their plan, no matter what the rest of the world is doing. They have a mature temperament during both the peaks of euphoria, as well as the depths of terror, with a healthy understanding that a well-designed written investment and financial plan will get them through both.

No predictions. No witch doctor investment sorcery or magic investing formulas. Just hard work, patience and discipline.

By |2018-12-20T16:24:33-04:00June 22nd, 2018|Blog, Great Investors Series|

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