Rational Advisor

Yep, bad things actually do happen. And some people call them “crisis”. The investment industries propeller heads refer to the incidence of “crisis” as “event risk”. The fact is, unexpected “crisis” have always been interwoven within the fabric of the economy and investment markets . As much as we’d like these “event risks” to go away. They’re always waiting to surprise us when we less least expect them - and when most are least prepared.

Since 1920, the US stock market (I use the US market because they have the data going back this far) has been hit by seven critical events:
- the September 1920 terrorist bombing on Wall Street that targeted JP Morgan’s head office
- the May 1940 German invasion of France
- the October 1973 Arab Oil embargo
- The August 1974 resignation of President Richard (Tricky Dicky) Nixon
- October 1987’s Black Monday and the resulting Financial panic
- the August 1998 Russian debt default and collapse of the Nobel Prize winner run Long Term Capital Management
- the terrorist attacks of Sept 2001

During each of these “crisis”, the Dow Jones Average fell by at least 18% within a matter of days or weeks.

Still while such disasters may be unpredictable, they’re remarkably consistent. In fact, they pop up in almost every decade, averaging about once every 12 years.

And now, it’s 2008 and we’re at the back end of this decade.
and these are the bubbles we have seen in the last three decades

In the 1980’s it was Japan ended in early 1990’s
In the 1990’s it was dot-coms ended in early 2000’s
And now we have ???? (Oil/China/India) ending in early ????

As investors we have to learn to ignore the noise of current events, and keep our eyes on long term developments. What we are seeing is that there is just too much tendency to chase performance (I know everyone wants to see high performance, but does everyone also want to see the dramatic drops that come along with the dramatic performances). To be a good investor you need to be disciplined (sticking to a sound intellectual framework), diversify (not hold too much in one thing), invest systematically (add to your investment programs monthly - even if its only a little bit) and finally invest for your long term.

It’s almost like the doctor will tell you

“Don’t smoke, drink in moderation, eat a balanced diet, get exercise, avoid stress and see me on a regular basis to make sure you are on track”

I have no idea when the investment mood will change or what will change it. But I do know that when everyone is looking up or down, it is the perfect time to be looking the other way. It’s one thing for markets to discount the future, but the time to worry is when, to borrow an old phrase, they start to discount the hereafter. There’s more than a little of that happening now.

They are discounting the huge appreciation in gold (“Gold will go to $2,000 on ounce”, “The US will go bankrupt”), discounting Oil (”Oil to be $150” “They are not making any more of it”), discounting emerging markets (“best area to be invested in”), discounting China/India (“best growth of economies”, “Look at the number of consumers they have”, “they have a better education system’).

All these things were said before in the previous decades, and people did get excited then about it

Gold appreciated in the early 80’s and mid 90’s – only to come dramatically down
Oil appreciated in the mid 70’s, late 80’s and early 90’s – only to come dramatically down
Emerging economies appreciated in late 90’s – only to come dramatically down
China, India and before that Japan also appreciated int eh past – only to come dramatically down.

Bill Gates said something smart a number of years ago referring to technology revolution in general

“We have a tendency to overestimate what is going to happen in two years and underestimate what will happen in ten”

I believe this applies just as well to the investment markets.

We tend to get very excited or very depressed about all the things happening now, and ignore that the investment world is also made up of good companies earning still good profits - irrespective of if they meet their “estimated forecasts”. Today I see concerns around Oil, because inventory rose as expected - Uhmmm - whose bloody expectations were they - because as far as I am concerned they still rose. They didn’t go down! And I see banks being marked down, because they do not meet some analysts “expectations” etc etc. Yet, the markets react to this “below expectation” number.

What happens is that the market over reacts and dumps these fine companies. The smarter investors realize that these volatile times are temporary that take a peek at that long term investment chart and see that it is still continuously sloping upwards and to the right. And that this is a blip in the overall investment program.

The smarter investors are adding to their Sound investment intellectual Framework at better prices, with an understanding that nothing is broken

If your investment horizon is 10 to twenty years you can expect at least two such major “crisis” - are they avoidable - No, because they are not predictable. Can you manage out of them - Yes, with your Sound Intellectual Framework

Rational

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