In my modestly short time on earth, I have never experienced a worldwide event like the Covid-19 epidemic. I do not remember an event that brought the majority of the world together to focus on a single call to action. Maybe the Olympics bring a similar feeling of simultaneous unity and combativeness, but the gravity of our current crisis dwarf the impact of the Olympic games.
I’m curious if this environment has any similarity to the atmosphere during of the World Wars or the Spanish Flu. The world focused on a single fight. The outcome unknown, our fates uncertain.
In the world of uncertainty, we are all encouraged to focus on what we can control. And to worry little about what we cannot. Easier said than done with current events, but no less true. I cannot even pretend to understand the science and medicine behind Covid-19, or in the moment predict what direction it will send the financial markets. What I can control is how I should act, and how I should encourage others to act in the realm of financial responsibility.
For this month’s ‘For Your Consideration’ I want to address the difficulty of doing the right thing, when the right thing is emotionally painful. Long term investing and a buy and hold strategy is the easiest task to take on when the markets are climbing, and one of the most difficult as the markets crash. But statistically, staying the course and not trying to time the market is always the best path. Countless studies have shown that changing your investment strategy to take advantage of market volatility is the losing play over the long term. You might win in the short term, but it’s doubtful you’ll win over time.
When the market is crashing it’s hard to keep your cool. Every news article is negative, every prediction sour. And of course, there are stories of those few who are ‘winning’ in this atmosphere of big losses. Maybe this is the time we should try something different. Just this one time we should make a move. Right?
I want to go back to WWII to cite an example of making the right play. In the show ‘Band of Brothers’ there is a story arc that takes place during the Battle of the Bulge in Bastogne. The time is winter and the conditions are miserable. Easy Company is being ambushed by the enemy and artillery is erupting all around them, turning the landscape into fiery explosions. The soldiers take evasive maneuvers to survive the battle, and of course, many don’t. What is interesting about the battle is something I learned by watching the show with former roommate, who was very familiar with war tactics and is now employed by a defense contractor. The best odds to survive that type of attack is to simply hug a tree. Don’t try moving, just hug a tree, and wait for the attack to end.
In fact, it was calculated that doing this simple act of taking cover and not moving increased your chances of survival by almost double. Imagine having to consider that option. Staying still, while things exploded all around you, or taking action and moving in an attempt to protect yourself. Human nature would say staying put is a fool’s errand, and of course you should attempt to control your own destiny and get out of the situation the best that you can. Statistics, on the other hand, would disagree.
The comparison, obviously is a stretch, and a loss of our net worth is nothing compared to what all great soldiers have sacrificed for us. But the point I’m trying to make is that human nature makes it hard for us to do what is right, even when we recognize what is right. We always have this sense of dread in thinking ‘maybe this time it’s different’.
Is this time different? Should investors be making moves? Should the ‘buy and hold’ strategy yield to efforts to time the market? The answer is an unsurprising, no. First, market timing requires too many variables the average investor can’t use to their advantage and it cannot be done consistently. More importantly, the strategy of market timing requires an understanding of variables most investor can’t interpret. If you don’t ‘market time’ as a career you are not likely to be successful.
The average investor also has a hard time accepting the math and falls into the trap of thinking this time may be different. As hard as it is to hold on to a stock when you aren’t market timing, it’s even harder to buy back into a losing stock when you are market timing. The average investor who panic sells misses the recovery and loses out on monumental gains. This makes timing efforts pointless. To market time correctly, you have to be right twice (market high and market low), over and over and over again.
So, if we accept that we are not the next Nostradamus, we must prepare to dig in and wait out the pains of a crash. We must accept the philosophy that says, ‘prepare for the bear market during a bull market and then be prepared to wait it out’. We know the game plan and we know there is a high likelihood the game plan will work once again. Even if it all feels different.
That doesn’t make it any less scary. That doesn’t mean doubt won’t linger and we think, ‘maybe, just maybe, this time is different. Maybe this time the statistics are lying to us.’ And the longer it lasts, the more the doubt will creep in. But given time we will again look back and reflect, ‘oh yeah, I remember when that happened’. All current events will become yet another moment in history, and mankind will march on. It’s impossible to know how long it will take to get back to ‘normal’, but we will. This too shall pass.
No matter what happens around you, continue to hang on to that tree.