Fear filled with reasons

What follows is an apocryphal sound bite from financial media inspired by the events of a day in mid-July 2021. This quote could very well take place on any given day, a few dozen times per year, with dates, parties, and events interchangeable:

A seven-day positive streak in the markets was broken with the news that Google is being sued for anti-competitive practices related to the operation of their app store. As this news broke, we’ve learned that the Japanese government decided to ban spectators from the upcoming Olympic Games because of the worrying surge in COVID cases. Additionally, labor numbers, employment numbers, news of a hurricane approaching the Atlantic coast, and a half dozen other things that are freaking us all out has led to a several-hundred point drop in the Dow Jones index.

Like I said, replace Google with Apple, replace Tokyo and Olympic with Europe and tourists, and you’ve got a whole new news day filled with reasons to be fearful. Reasons to be negative.

But are these reasons filled with fear or fear filled with reasons?

Often and especially after sequential days of positive movement in the indices, the market turns negative and starts to look for reasons to justify that negativity. The usually turn to macroeconomic indicators or force majeure headlines like extreme weather or, in the case of 2021, COVID numbers. If we see beyond this “fear filled with reasons” tendency, the mindful investor can capture the opportunity to open or add to a position otherwise avoided due to high valuations.

In order to identify these moments of market inefficiency, it’s helpful to identify what it is that you DO fear.

Here’s what I fear:

  • Long-term economic decline
  • Permanent decline in birth rate
  • Lack of faith in business and industry
  • Hyperinflation
  • Threats to democracy and the rule of law
  • Large-scale war that includes nuclear and/or biological weapons
  • Irrevocable ecological destruction brought about by climate change

Of these items, the only ones I’m legitimately concerned about are war and climate change. War could very well happen tomorrow and there’s nothing I can do about it. And if my orbit does become impacted by weapons of mass destruction, I’ve got bigger problems than my portfolio balance. Climate change probably won’t permanently impair our way of life until well after I’m dead. So, from an investing perspective, I don’t have any reasons to be fearful.

The media and the market will give you as many reasons to be fearful as you have time to dream up. Incorporate them into your investing strategy at your own peril.

In two ways, these actors are doing you a favor.

First, they are forcing you to envision the near future as something other than what it is—relatively safe and relatively predictable. The day journalists get on the news and say “Everything’s swell” is the day I will head for my basement closet.

Secondly, every time someone, whether a media personality, a politician or a fund manager gets on TV and enumerates the things you should be scared of, they present a buying opportunity for those of us fortunate enough to know what we know.

The world is relatively safe, relatively predictable, and over 80% of Google’s revenue still comes from advertising. Buy $GOOG.

Asymmetry

You’d have to ask a biologist to be certain, but I suspect that things in nature tend toward symmetry. The left side of the human face tends to look like the right side. One edge of a leaf looks largely like the other. Not so for investment gains.

Regardless of market optimism, regardless of where we are in the market cycle at a particular moment, regardless of what you think the economy holds in store, the potential for gains is astronomically asymmetrical to the likelihood of losses over time. The reason is simple. The most you could ever lose on an investment is 100% of your initial capital. The most you could gain is infinity.

Infinity is a pretty stupid word when talking about investing. But the 10,000% gain you would have gotten from your ownership in Netflix or Amazon is indistinguishable from infinity.

Because of the asymmetry between gains and losses, it is not absurd to propose that if you make 20 investments and 18 of them turn out to underperform or merely perform with the market averages, just holding those two remaining stocks for the long term just might put you in a position of life-changing outperformance.

Imagine that. In what other context can 10% of your decisions that result in a positive outcome outweigh the other 90% of your decisions that have a negative outcome.

As investors, the odds are heavily tilted in our favor. If for no other reason, the best time to start investing is now.

Election

My favorite tweet from the last few days:

We’ve turned the page on “Tuesday, Part 5,” and Joe Biden was officially projected to be the 46th President of the United States on Saturday, November 7. All the news networks showed footage of Biden/Harris supporters spilling into the streets. Jubilation and affirmation from the side that won, silence and disbelief from the side that lost. It has always been thus.

One thing that is distinctly different in the current scenario is how the Market reacted. In the days leading up to the election you can expect fits and starts. We mostly got starts with several +1% days for the S&P and or NASDAQ. Once Election Day came and went without a clear winner, we could have all expected the Market’s reaction: selling.

The Market abhors uncertainty. The Market more often than not reacts to an unwelcome situation more favorably than an uncertain one. So, the fact that the Market remained positive during the week of the post-election ballot counting is truly incredible. It happens that Election Day overlapped with 3rd quarter earnings season, so in a fit of uncharacteristic rationality, the Market actually did what it is supposed to do–move in relation to market-specific inputs rather than exogenous events such as elections or Twitter feuds.

Why me?

When friends learn of my interest in geology and my experience teaching outdoor ed summer courses, their first comment sounds something like, “I thought you were a Spanish teacher.” Within a minute or so, they acclimate to the fact that I have pet projects and I work at a school that nurtures those passions so long as they result in meaningful learning experiences for our students.

When they learn about my passion for investing, the acclimation period takes a little bit longer. That’s when the “J word” creeps in. Just. “But, you’re just a Spanish teacher.” “Aren’t you just a teacher?”

The world of investing has developed such a thick patina around it, that many assume that it requires as much training and deliberate practice as, say, a medical degree.

The consequence for me is meaningless; they assume I gamble on meme stocks and trends du jour. The consequence for themselves is quite a bit more severe; they assume that learning to invest is and will always be out of their reach.

What a costly assumption.

Investing may be the ONLY practice, be it institutional or retail, in which formal training is not only not required, but may actually harm your chances for success. I’m not allowed to litigate so much as a zoning violation in Georgia courts, and woe is the hapless acquaintance that allows me to remove their spleen from their torso because I watched a few YouTube videos.

But investing really and truly is an exercise that we can learn by doing. So long as we take a measured approach and reflect on the outcomes of our decisions, you and I can become as successful (if not more successful) than those that have received formal training and earned themselves the imprimatur of a CFA or RIA designation.

If for no other reason, efficient market hypothesis and modern portfolio theory. I rest my case.

However, even though investing truly is within the grasp of anyone willing to extend their hand, it does beg the question, “Why me?” “Why am I (you, your friend, your friend’s friend, etc) qualified to manage my own portfolio?”

I can only answer that question for myself. So, here goes.

Two phone calls

I finished my Masters in Spanish Literature from The University of Georgia in 1998. By early summer I had my first teaching assignment in a rural Virginia public school system near the Chesapeake Bay.

Shortly after signing the contract with the school district, I got two phone calls. The first was from my mom, calling to congratulate me and to tell me how proud she was of my hard work and of the person I was becoming. (I won the Mom lottery.)

The second call was from my grandfather.

At the time Earl (his nickname in the family was “The Earl of Curmudgeon”) was an 80-ish-year old hermit that was fired from his lobbying job in 1975 and used his severance to invest wholesale in the stock market. His two rules (1. It has to pay a dividend and 2. Sell it when it doubles) worked well for him over the course of 25 years. And although he had amassed a laudable retirement fund, he and my grandmother lived much as the Depression-aged generation tended to live—simply and only with complaints they weren’t inclined to do anything about.

Earl was a prickly sort, and I’m not sure that he knew my actual name. He only called me “#3,” as I was the third grandchild by birth order. The 1998 phone call that started my investing journey went as follows. This is almost a verbatim retelling:

Number Three, this is your grandfather. I hear you’ve managed to secure gainful employment and will soon begin receiving a paycheck. Before you hand any of that money over to the Barons (his term for fund managers), come up to Chevy Chase. You’re going to learn to invest.

We grandkids tended to do what Earl told us to do. So within a few weeks, I found myself sitting on my grandparents’ scratchy sofa in Maryland, learning to invest like an 80-year old man.

I reference my mom in a previous post. She, too, became an investor and as a result turned her life of narrowing possibilities into one of near limitless opportunity.

Mom and Grandpa became my primary interlocutors as I fumbled through my first years in the market. Fortunately, that time period included the dot-com bubble and the Great Financial Crisis. The lessons I’ve learned have served me well over the last decade or so.

If you’re going to ask “Why me?,” you should also ask the following questions:

  • Why Earl? (Because he did.)
  • Why my mom? (Because she did.)

Rather than asking “Why me?,” try this question on for size.

Why not me?

Faith, Time and Homework

My motivation for investing is to provide financial independence for my family. My passion for investing comes from watching two important people in my life, my mom and my dad, spend their lives investing in very different things.

My parents married in the early 60’s and had their first child in 1968. They undertook what economists call “household formation” at the tail end of a boom that began in 1945 and began to fall apart in 1973. Throughout their childhood they watched as the post-war boom and the reintroduction of GIs into the workforce transformed our economy from one of agricultural and industrial output into the greatest consumer economy the world has known.

In the postscript of his book “The Psychology of Money,” Morgan Housel lays out the daisy chain of events that led this transformation. The GI Bill extended lending terms to returning soldiers that allowed them to borrow money affordably. Production capacity and innovation borne out of the war effort put millions of veterans in steady jobs with increasing incomes and modest expectations of household luxury.

The answer to the question, “What are all these GIs going to do after the war?” was now obvious. They were going to buy stuff, with money earned from their jobs making new stuff, helped by cheap borrowed money to buy even more stuff.”

My mom and dad found themselves at a transition point between the easy credit and increasing lifestyle expectations of the post-war decades and the period of high inflation and darkening prospects of the mid 70’s. They had every reason to continue the country’s trend of debt-fueled consumption, but for a number of reasons, they chose to live simply. They rarely took on debt, taught their three boys how to build a budget, and wouldn’t give us our allowance until we turned in last month’s ledger detailing how we spent our “income.” In short, they had a good set of heads on their shoulders and bucked the trend of “more is better.”

Dad worked in finance. He was an electronics analyst for an old-line Wall Street firm. But he didn’t trust the market with good reason. During his lifetime, the stock market delivered paltry returns, and he had a front row seat to the 1973-74 recession and the junk bond mania of the early 80’s. His idea of a sound investment was a passbook account for each of his boys that paid simple interest of around 8%. And he invested in his job. His strongest identities were 1) family man and 2) loyal employee. Which is fine until your employer drops you like a bad habit.

Dad was a part of the layoffs that started with the 1984 market crash and concluded with the “big one” of 1987. Once he realized no one was hiring men for finance jobs in their late 50’s, Dad finished out his life working retail at a handful of small-box and big-box stores. He also finished things out single. His bouts with depression brought an end to his 27-year marriage that produced 3 decent boys. Even working customer service at RadioShack and Sears, Dad held his head high and did his jobs admirably. His identity as rock solid employee was intact. This eminently good man died in 2003. A paid-off townhouse, a small bank balance, and an outstanding bill for a new water heater was all he had left.

Mom worked as an accountant in the 1960’s until the fine people of Citibank informed her that “no one will take financial advice from a pregnant woman.” So, she stayed home throughout the 70’s and 80’s to raise her kids and support her husband through his tumultuous career path. After Dad’s second round of layoffs, Mom started taking jobs at churches and retreat centers as a program director and accountant. When things got really bad she took a fourth job in the form of a paper route (I was her co-pilot). After their divorce, Mom got ordained in the Episcopal church and began her journey in prison ministry.

One of mom’s jobs included room and board, so when it came time to divide assets in the divorce, Mom let Dad keep the house and in exchange kept his life insurance policy. Mom lived a very Spartan lifestyle for the years between her divorce and my Dad’s passing. As a first year teacher I out-earned her by a few hundred dollars, not including my plush public school health insurance plan.

When Dad died, Mom received a modest life insurance payout. Rather than using it to upgrade her Nissan Sentra, she spent not one dime, and did something my Dad was never willing to do–she learned to invest in the stock market.

Fast forward 17 years: Mom is living a life she couldn’t have imagined for herself just 20 years earlier. She’s not fantastically wealthy, but she’s free; free to do what she wants, when she wants, for however long she wants. She treated herself to a retirement home, where for the first time since she was a very young child, people were taking care of her for a change. And about every week or so I call her or she calls me and she says the same thing: “Oh Ted, I’m just so happy.” I wish that kind of ending for my dad. But you can’t influence the past, only the future.

I tell you this story to illustrate two things. First, assuming you’re a regular reader of this site, you might wonder why after long periods of silence I find myself writing about finance. In my last post I explained why I have become much more visible in my interest in investing. I find myself considering others’ stories, be they stories of companies, governments, consumers, or other investors doing meaningful things, and I find those stories increasingly relevant to the world around me, partially I believe, because I’m beginning to connect my investor identity to my other identities. And if I don’t write them down, these threads slip away as the next “big event” tumbles across the CNBC chyron.

Second, I wanted to share the lens through which I see the world of investing, through the lens of my parents. My dad had the intellect, the access and the resources to increase his odds of financial independence, but he didn’t. My mom scraped and saved and when a modest windfall hit, she learned what she needed to learn, and through a very conservative investing philosophy, she achieved financial independence in just 15 or so years. Dad was skeptical about the market. Mom had faith in responsible leadership of American businesses. Dad relied on his salary to provide for his family. Mom leveraged the wealth-creating potential of share ownership in a handful of companies. She also had a great gift, the greatest gift, which is the element that is most meaningful to me and to anyone reading this. She had time.

Faith, time, and a reasonable amount of homework. That’s what it took to change my mom’s story. Mom’s story can be anyone’s story. It’s the story I want for my family. It’s the story I share with my students as they begin their investing journey. It’s the story I share with my colleagues as they fear that a career in education won’t be enough to provide for their families.

What’s your story? Who’s writing it?