There is always a crisis du jour.
What sets successful investors apart from doomed-to-fail investors is the discipline to hold to a strategy and a willingness and ability to differentiate between what is merely transitory and what is likely to be a serious continuing trend.
After many years in this business, I have seen both types of investors and learned from the successes and failures of each. Those whose only measure of success is whether they are keeping pace with the S&P 500 in one quarter or one year make the worst investors. They see investing success as a race in which their only goal is to beat one benchmark — and over the short term at that! When they fail to do so, they change their investing strategy like some companies change their business strategies: Coca-Cola (KO, Financial) isn’t selling? Create “New Coke!” Oops, that was a fiasco? Buy a big orange juice company! Not good enough? Let’s get into bottled water! These market players change their tactical approach, their broker, their advisor, their newsletters or whatever every year — and still never find success.
Successful investors care less about beating the S&P, the FTSE 100 (United Kingdom,) the DAX (Germany,) the Dow, the Nasdaq or any other benchmark. What they care about is (1) protecting what they have while understanding volatility will move their portfolio somewhat in either direction and (2) over any 2-3 year or longer time frame, seeing improvement in their financial position. They share our philosophy of “ratcheting” our gains.
We understand that there will be periods, sometimes long periods, where we are frustrated by our inability to move ahead, alternating with periods where we leapfrog our most optimistic expectations. It’s just the nature of the beast that is the stock market! When we review our nearly-double outperformance over the S&P over the past 16 years through 2014, we are not surprised to see periods of stagnation and periods of significant elevation. One of the big reasons for this is our willingness to take on what looks like excess risk like, say, buying European banks and insurers with exposure to Greece.
But what looks like risk at the time is often opportunity for outsized gains as short-term thinking panics some into selling at any price. Yet after most “crises” the various market participants come out of their fallout shelters the next day and find that the world hasn’t descended into nuclear winter after all. Just take a look at a few of the most recent such instances. Greece? A pipsqueak of a crisis compared to these...
- September 1, 1939: Hitler invades Poland, beginning a cataclysmic world war that would last nearly 6 years. This was at the cusp of a 3-day weekend in the USA, giving investors a chance to think clearly before acting in regretful haste. On Tuesday, September 5, the Dow actually rose 9.5%.
- December 7, 1941: America attacked at Pearl Harbor. After the Sunday morning attack, the Dow fell from115 to 112 on Monday, dipping only briefly over the ensuing couple months of battlefield reverses, then rising massively during the rest of World War II.
- October 22-26, 1962: The Cuban Missile Crisis. The possibility of thermonuclear annihilation pulled the market lower by 1% for that week — but then powered ahead 3.5% in just two days as the Soviets removed their weapons from Cuba.
- November 22, 1963: President Kennedy is assassinated. . The stock market was closed shortly after the President’s death that Friday and didn’t re-open until Tuesday, at which time the Dow gained 4.5%. Parenthetically, a wide-eyed 33-year-old investor named Warren Buffett (Trades, Portfolio) took advantage of the plunge in American Express (AXP) stock (which also fell because of some loans guaranteed by them to a Ponzi schemer that month) and bought 5% of the company for $20 million — shares he still owns.
- April 4 and June 6, 1968: the assassinations of Martin Luther King Jr. and, two months later, of Robert F. Kennedy. Despite rioting in scores of cities, the Dow fell less than 1% on April 5., and actually rose 4.6% in the following week. When Robert Kennedy was shot, the market fell 1%, but then recovered in the next few days.
To save time, we’ll skip over the various Latin American and Asian contagions, the demise of Long Term Capital Corp, and scores more to note just one additional and more recent example:
September 11, 2001: Already reeling from the bear market that followed the dot-com implosion, this was the straw that broke the camel’s back — for a short time. But the Dow returned to September 10 levels within two months, on November 9, 2001, and it kept rising into the spring of 2002.
Which brings us to the question of the hour. Should you panic because Greek voters have decided they would rather default on their debt than face continued belt-tightening?
My answer is: clearly not. Crises of the past, including World Wars and threats of nuclear annihilation, have been crystal clear in their lesson that the market is most likely to give you the opportunity to make a non-emotional exit in the coming days and weeks if you choose to do so.
From my perspective, the greater investment risk would be to sell your portfolio in a panic, (usually followed by staying out of the market for far longer than you should if you expect to maximize gains.) Instead, you might consider doing what we do: find exceptional values in times of adverse market over-reactions. Think about the following facts about Greece and compare it to the crises you’ve seen in the markets in your own lifetime:
While Greece’s GDP doesn’t rank high enough for the clever map above, if it did it would rank on par with the Detroit-Warren-Livonia, Michigan Metropolitan Area.
The chart below, courtesy of Don Dodge, shows the percent increase or decline in GDP for some key European nations since the financial crisis of 2008. Seven years later, only the UK, Germany, Belgium and France, in that order, have managed to increase their GDP. The worst of the others in this comparison, Italy, Portugal and Spain, are down just 10% or less. Only Greece has fallen precipitously, with its GDP down roughly 25% during these seven years.
If you haven’t panicked out of your holdings because Detroit is in bankruptcy, then you might want to consider that Greece’s impending inability to raise capital (except most likely from Putin’s Russia, and then with geopolitical strings like naval basing rights attached) is an investing non-event. Now Chicago, with a GDP the size of Switzerland… if you’re prone to worry, that’s something to worry about! < >
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As Registered Investment Advisors, we believe it is essential to advise that we do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as "personalized" investment advice.
Past performance is no guarantee of future results, rather an obvious statement but clearly too often unheeded judging by the number of investors who buy the current #1 mutual fund one year only to watch it plummet the following year.
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