By the time it slammed into Atlantic City, N.J., on Tuesday, Oct. 29, winds were recorded at more than 100 miles per hour. It had become the largest Atlantic hurricane on record.
As a New Yorker, I saw Sandy’s devastation up close and personal. Its storm surge hit Manhattan, causing flooding and cutting power to millions in and around New York City. The greatest city in the world was humbled… causing many to live like those in third-world countries.
On Sunday, New York City Mayor Michael Bloomberg ordered the evacuation of those living in low-lying areas in NYC, shut down the city’s subway system, and ordered all public schools closed on Monday.
By closing the subway, which moves more than 5 million per day, the mayor was in effect closing down NYC. In the 108-year history of the NYC subway system, it was only shut due to weather one time before—in 2007 due to the approach of Hurricane Irene. For hardened New Yorkers, closing the subways was like a shot across the bow—this hurricane was serious.
Not so bad
By Monday morning the winds began gusting. I made sure to stock my house with flashlights and batteries, and filled up my car with gas.
Several people I ran into that day were telling me that I was being an alarmist. They said that Hurricane Irene in 2011 was “hyped up” too, and there was no real damage when it struck.
But what was most amazing to me were the local news interviews with the residents who lived in Battery Park City in lower Manhattan, on the banks of the Hudson River.
Residents were asked if they knew of the mandatory evacuation for their area and the potential of a storm surge the likes of which Manhattan had never seen. Each one replied they were fully aware yet were not leaving because in 2011 Hurricane Irene was not such a big deal… and neither would Hurricane Sandy be.
Despite the overwhelming evidence, warnings, and up-to-the-minute satellite images…these people made a decision based on their most recent experience and not the facts. In psychology, it’s called the recency effect—giving more weight to recent events than to historical information. Unfortunately, being anchored by this bias resulted in several people losing their lives when they had plenty of warning to get to safety.
Caption: Hurricane Sandy over the East Coast of the United States along the Atlantic Ocean on October 29th.
Source: NASA GOES Project
While not as dire, investors also are impacted by the most recent past. One example is how investors, after the dot-com bubble burst in 2000 to 2001, avoided technology stocks and wouldn’t buy them if they were paid to take them.
During the run up to the bust, technology stocks were loved and owned by a large percentage of investors. They claimed that valuations didn’t matter anymore, and that we are in a new paradigm. When the bubble burst, there were more than a handful of technology stocks that were trading for less than the cash on their balance sheet. Investors, basing their decision on the most recent past (dot-com bubble burst), avoided buying dollar bills for 50 cents.
Reading and listening to the bearish sentiment, you would never think that the S&P 500 is up 15% in 2012[url=#_edn1][/url]. After the financial crisis of 2008, when the S&P 500 lost half its value, investors have shunned equities. This is in spite of the S&P 500 rising more than 125% from the low of March 6, 2009.
Instead of flocking to stocks, investors are running the other way. Fidelity recently announced that more than half of the $1.6 trillion they manage is in fixed income and cash assets. Fidelity’s asset allocation research team noted that bond inflows industry-wide have outpaced stock inflows--$1.1 trillion vs. $33 billion, or [i]33-1 since the financial crisis began.
Caption: Investors allocated $33 to fixed income and cash assets for every $1 they allocated to equities.
It’s fair to say that most investors missed one of the greatest bull market runs, and chose to invest instead in assets paying very low yields… because of the recency effect.
As you know, we’ve been recommending stocks all throughout the past five years. In fact, during market downturns, our portfolios had their highest level of equity exposure. There were several times that we had more than 18 stocks in the Prime Time and Special Situation portfolios.
We also didn’t cut our winners short during downturns in the stock market. Valuations guided our holding stocks, not the stock market’s gyrations.
Buckle Inc. (+219%) was added to the Prime Time portfolio when the financial crisis was under way in January 2008; Teledyne Technologies (+1142%) and Atwood Oceanics (+222%)[url=#_edn2][b][ii][/url][/b] were added in January 2009—when the stock market was still plunging. All of these stocks are still in our portfolio and will continue to be there as long as they continue to be financially strong and trade at attractive prices.
Our decision to hold them will not be based on any bias other than their intrinsic value in relation to the underlying business.
[url=#_ednref1][i][/url] Including dividends through 12/11/12.
[url=#_ednref2][ii][/url] As of Dec. 11. 2012