Randomness

What We Worry About

It always happens right before I head to the airport.

Butterflies in my stomach.

Little waves of nausea.

Tight chest.

I have to tell myself to breathe deep.

“Calm down.”

“It’s going to be ok.”

What am I so afraid of? Unlike many, I am not afraid of flying. I am afraid of missing the plane.

If I could translate into dollars, I would calculate that my time and mental energy equate to a very high insurance premium (three hours of time and life-shortening worry) for a highly unlikely event (I will be so late I will miss the plane).

It seems we are hard wired to worry about things beyond our control. I cannot control when the plane leaves. It is leaving with or without me. We cannot control when a teenage child wants to get their driver’s license. Nor when a parent turns 90 and wants to keep it. These are somewhat scheduled events that we can fairly expect to happen, no matter what.

Scarier yet are random events. Market meltdowns, tsunamis, cancer, dementia, elections, terrorists, bonds, hackers…have I got your heart rate up? Butterflies? Tight chest?

Breathe.

Remembering and accepting what we cannot control…wasn’t there a prayer about that? My flying experience shows I still have a ways to go putting the Serenity Prayer into practice. In the meantime, I have an irrational need to leave home at least two to three hours ahead, to get to the gate at least an hour before the flight, and, when I get there, to sit where I can see the gate agent and the boarding door.

But the most overdramatized things I hear about (such as the Fed is too loose, hyperinflation is inevitable, or the dollar is doomed) tend to come from advertising-hungry news sources. All of these worries I am able to a) discount and b) ignore.

How can you do the same with media-induced angst? Pay attention to those butterflies. When you feel them, try asking yourself:
a) Where are they coming from? And breathe.
b) Can you do anything about it? And breathe.
c) Who is the source? And breathe.
d) Does that source have an economic incentive to create some drama/worry? And breathe.
e) Give yourself a gold star for getting this far. Then, of course, don’t forget to breathe again.

If you are still worried, see a financial professional about what kind of costs – money, time, or energy – you are willing to pay to offload your perceived risk. Or, see a mental health professional about getting to the root of the worry – it might be stemming from something else. Do whatever you need to to find the serenity to accept what you cannot change, the courage to change what you can, and the wisdom to know the difference. Even if it’s only about your money.

And when you get there, let me know. I might need a ride to the airport.

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Picking the Right Horse

Every year, financial magazines and newspapers come out with a “Best Mutual Funds” issue. They pick which ones have the best 1, 5, and 10 year track records. They print flattering reports on the fund managers and their philosophies. For once, then, I was surprised to see Fortune magazine, in December 2009, went back and analyzed what percentage of actively managed funds actually beat their assigned index. In other words, what percentage of the time would investors have been better off by just buying an index fund instead of picking one of those profiled in the magazines? A recap of the results, compiled by S&P:

For Large Cap (index is S&P 500): 37%
For Small Cap (index is S&P Small Cap 600): 32%
For Foreign Stock (index is S&P 700): 13%
For Int. Term Bonds (index is Barclays Interm Gov/Credit): 20%

In other words, somewhere between 13% and 37% of managers accomplish the mission of beating their assigned index. This data was compiled over a 5-year period. Academic studies that look at rolling 5-year periods find that the managers who fit in that 13% – 37% category changes. In other words, for a particular 5-year period, most managers who “rise to the top,” were at the bottom in some 5-year period prior to that point. So, the trick then becomes, picking the right “horse,” at the right time, and staying on it for exactly the right ride. For more information and data on how difficult this can be, see Stuart Lucas’s book on “Wealth,” or Burton Malkiel’s “Random Walk Down Wall Street.”

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Economics Forecasting is a Parlor Game

Thus spoke Chris Davis, CEO of Davis Venture Funds, at a conference I attended in May. For many people, “economics” is synonymous with the stockmarket. The assumption seems to be that if we can predict where the economy is going, then we can predict what will happen with the stockmarket. Further, if we can predict which sectors or countries are destined for short-term success or failure, then we can translate that knowledge into successful decisions about investing.

Data about the correlation between the health of the economy and the “health” of the stockmarket, however, repeatedly shows this to be a doomed strategy for investing. The market, in fact, is a leading indicator of economic upturns and downturns. This fact is so well established that the S&P 500 index is included in the top 10 leading indicators used by economic forecasters. Again quoting Mr. Davis, “This we know. 1. The market turns before the economy. 2. The sentiment turns after the market.”

In other words, economic forecasting may be a fun parlor game for investors, but it is useless as an investing decision tool. By the time we can see the economy’s direction, the market is ahead of it. Therefore, investment strategies that depend solely upon being in a sector, country, or market right before it rises, and out of it right before it falls, have an abysmal track record of success. See Princeton professor Burton Malkiel’s A Random Walk Down Wall Street or Carnation family scion Stuart Lucas’ Wealth for a synopsis of the numerous studies done on this subject.

Successful investment strategies are as numerous and unique as individual investors themselves, yet what they all have in common is: 1) time in the market; 2) high savings rate; and 3) absence of fear and greed in decisionmaking. There is no proven formula to produce an economy that can feed, house, employ, and nurture its entire population. But, fortunately, if we stick to an investing strategy crafted just for us, we can feed, house, employ, and nurture ourselves for years to come.

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