Crisis or Opportunity?
October 20, 2008
Dear Jeff and Donna,
A lot has been said and written over the past several weeks regarding the current financial situation. For the most part, it has been labeled as a crisis. But perhaps it is actually an opportunity. Opportunities usually don’t come to us looking like opportunities; they come to us disguised as problems, or predicaments, or even as a crisis.
I certainly don’t mean to trivialize the concerns and anxiety we are all going through, and understand how frightening things are right now. All of our investment accounts are down right now, and they are down considerably. As of yesterday, year to date, the Dow Jones Industrial Average was down -32.32%, the S&P 500 was down-35.55%, the NASDAQ was down -35.24%, and the Wilshire 5000 was down -35.57%. The Strategic Asset Management program we are using for your investments, Efficiencies™, has reduced the market’s impact, which is exactly what it is supposed to do, but you are still down. My average client account (including my own accounts), at this point is down about -26%. (Some are down more and some less, depending on how conservative or aggressive the account is, additions and/or withdrawals, if it is a billed account or not, and so on).
It seems as every day brings news of another large financial firm either being bailed out, bought out, or just plain out. Billions of dollars have been approved by not only our government but governments around the world to support major financial institutions. Unemployment is rising, incomes are falling, and there is a pervasive feeling of gloom that we are now either in or headed in to a major global recession. There is even talk that we are possibly heading for a depression (highly unlikely).
In the midst of all this, this country is about to elect a new president. Whether it ends up being Barack Obama or John McCain, there is a demand for constructive changes in how Wall Street and our financial institutions are regulated, and whoever wins will have to respond to that demand. However, it is a major decision and whoever wins is sure to take the country in a new direction that will appeal to some but not to others.
So how should you and I deal with all of this? How should we respond? What should we do? Let me offer a few thoughts.
First of all, while this situation is unprecedented in scale, it is not in nature. There have been market crashes, bailouts, government interventions, and major elections all throughout our history. Kevin O’Keefe, First Affirmative Financial Network’s Chief Investment Officer, in the attached letter dated October 10, 2008, offers some very useful perspectives on the history of these matters. I strongly encourage you to read his letter, and then read it again.
Second of all, what we are witnessing (and experiencing) is an extreme expression of fear: panic. There are basically two emotions associated with investing: fear and greed. Of the two, fear is far stronger and more primal, which has born out in psychological studies. However, both emotions, while perfectly normal and very human, work against investment success. (This is why I don’t manage your investments or my own directly: we use a third party, FAFN). Greed has people chase returns and buy at the peak of a bubble, while fear has people sell just as things are going down, and panic has them sell more as they go down more. I would encourage you to read James B. Stewart’s article in the October 15, 2008 edition of the Wall Street Journal, Panics and Bubbles Have More In Common Than You Think. Greed runs its course and so does fear: at some point, the buying will start again. In fact, it already has.
Arguably one of the wisest investors of all time, Warren E. Buffett, is buying. A few weeks ago he bought $5 Billion of Goldman Sachs and $3 Billion of General Electric. Why? He knows a bargain when he sees one. In fact, he has a wonderful letter in Friday’s New York Times, titled Buy American. I Am in which he explains why. Warren has a very simple adage that drives his buying: “Be fearful when others are greedy, and be greedy when others are fearful”. This is another way of stating the basic rule of successful investing: Buy low and Sell high. While this is very simple, it is not easy.
Am I suggesting that you should be a major buyer right now, as Warren is? No. I am recommending that if you are already adding to one or more accounts on a regular basis, a strategy known as dollar cost averaging, you continue to do so. Your mutual funds have been, and will continue to be, carefully buying shares that are very inexpensive right now. The most recent figure that I heard is that stock prices are down to levels we have not seen since 1985! I am not referring to just financial services companies but virtually any major company that one can think of has had its stock price beaten down by the markets. You may want to refer to the section in your financial plan where I describe the four types of risk.
What we are witnessing is Business risk that has now spread to Market risk.
Third, studies suggest that hands down, the wisest course of action is to, well, stay the course. Selling out now, and going to cash, will almost certainly cause irreparable, perhaps disastrous damage to your portfolio(s) and your wealth.
There was an excellent article in the October 9, 2008 edition of the New York Times by Ron Lieber, in the ‘Your Money’ section, entitled Down and Out…Or In? Switching to Cash May Feel Safe, But Risks Remain that explains this very well. I have read numerous studies on this subject and they all come to essentially the same conclusion: if you are out of the market and miss the upturns, you lose. In a rolling 10 year study, it was found that missing out on the 90 best days out of ten years resulted in missing about 90% of the available returns. The problem is those 90 days don’t happen all at once. They are a day here (like this past Monday), another day there (like yesterday), two days next month, and so on.
Fourth, there is a global commitment to turn things around. Ultimately, the markets all want to go up. Why? Because this is when money is made! As this global situation is addressed, by a cooperative effort from all of the major nations, I expect that confidence will at some point be restored and major banks will start lending again. Once this happens, at some point, the stock market will shift and the dominant trend will be up instead of down. As markets tend to be leading indicators of the economy, this will probably start to occur while we are still in the recession, which is the historic pattern.
Fifth, eight years of incompetent leadership by George Bush and company are coming to a close. No matter who wins, we will likely see more regulation of the financial markets, which has been sorely missing since the Reagan administration. Personally, I am very excited about the prospect of Barack Obama, who is certainly leading in the polls, becoming our next president. In my opinion, he is a natural leader, incredibly charismatic, smart, eloquent, energetic, and gifted in his ability to find common ground with people. I believe he would offer the world a far more appealing “face” of U.S. leadership and the fact that he is black should help show the world that we are open and ready for major change. I feel that the last thing the world wants to see is another “angry old white guy” running the United States. Restoring our damaged relationships and regaining the trust of the many countries we have alienated is critically important going forward. I also believe that his proposed economic and financial policies will be better for all of us.
Perhaps what we are witnessing and experiencing is not a crisis at all. Perhaps it is the birth of what we, as socially responsible investors, have been waiting for, hoping for, and investing for. We are arguably in the midst of what could be the buying opportunity of a lifetime: historically, fortunes are made during times like this. However, they are usually not realized until the markets turn back up again. We are witnessing global cooperation on a scale that we have not seen since the Second World War. We are witnessing the demise of financial “dinosaurs” on Wall Street that are no longer relevant, and some of which have been destructive in many ways. Perhaps we are also witnessing the end of the “oil based economy” and the birth of a more sustainable economy. So, given all of this, what should you do?
Don’t panic, manage your spending, have an appropriate amount of cash in the bank, systematically add to your account(s) if you can, stay the course with your investment program, remember that your emotions are not your friends with regards to your investments and therefore should not be trusted, and trust history: it suggests that we have always had times like this AND we have always gotten through them, arguably stronger than we were before. At the same time, I need to remind you that past performance is no guarantee of future results.
I also recommend you consider turning the TV off, at least during the news, and take the opportunity to enjoy your lives and who and what really matters, such as your children, your spouse, your parents, your friends, and all the people that are important to you. Read a good book, enjoy some music, go for a walk in this beautiful fall weather, or whatever else you enjoy.
I have been in this business for essentially 30 years and have been through this many times. This experience has allowed me to view times like this as opportunities, not as problems. At the same time, I completely understand the natural concerns and anxieties that we are all going through, and do not take them lightly. If is it any consolation, while I do see this as an opportunity, I still have my own concerns and anxiety to deal with also.
I am here if you want to meet or talk on the phone. If you prefer to send me an e-mail, that is fine, although it does take more time for me to compose a response. I want to make myself as available as possible to all of my clients, and so the telephone is my preferred medium for communication.
In conclusion, let me say that it is an honor to work with you during this challenging time and I deeply appreciate your trust in me. Thank you for being my valued client.
Scott M. Buttfield, CFP®, AIF®
Scott M. Buttfield is a Registered Investment Advisor Representative of First Affirmative Financial Network, LLC (FAFN), an independent registered investment advisor (SEC #801-56587). FAFN is not an affiliate or subsidiary of Buttfield & Associates.