Plus Ca Change, Plus La Meme Chose

[DbPhoenix 42]

Simple Greed? Or A More Complicated — and More Dangerous — Fear?

Posted on March 30, 2013 by jcoumarianos

 

When people talk about “fear and greed” in the markets, they usually mean fear of loss by “fear.” However, often a stronger fear is fear is missing upside. Listen to Jeremy Grantham talk about how many clients he lost in the late 1990s for his conservative posture, or note that Steve Romick lost 90% of his investors during the same period for his, and you’ll understand that more subtle, but no less insidious, portfolio-damaging, fear. This is a kind of strange fear mixed with, not opposed to, greed. I suppose one could call it greed, but it doesn’t seem that simple.

 

It turns out, investors tolerate losses reasonably well as long as everyone else is losing. It’s kind of the investment version of misery loves company. Lose your clients’ money when everyone else is losing, and you’ll very likely keep your job. Lag a roaring market, however, and you’ll get dropped in a hurry.

 

This weekend the WSJ has a story about a couple, both physicians, who have re-entered the market after losing half their savings in the crash of 2008-2009, and parking their money in a bank account until now. The article notes

[t]his week, as the Dow Jones Industrial Average and Standard and Poor’s 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.

The following graph shows what the physician couple missed by selling stock and moving to a bank account at the market’s nadir.

 

 

So many questions arise from this couple’s actions: Why do they like stocks now better than they did when stocks were at half the price they are now? Do they think profits have increased so much to make valuations more compelling now? (They have since 2008-2009, but the Shiller P/E — taking the past 10-years’ average earnings – touched 13 in early 2009, and is at 23 now.) Are they even thinking of profits and fundamental valuations? And who is this advisor who has taken them on, and is letting them get into the market now? Who calls the shots in an advisor-client relationship? How many advisors will turn down clients who show an obvious propensity for bad timing and emotional reactions to price movements? And have the clients unconsciously hired the advisor so that if things go badly they can blame him and fire him?

 

Here is a key quote is from the wife, Ms. White,

What really tipped our hand was to see our cash not doing anything while the S&P was going up. . . .[w]e just didn’t want to be left on the sidelines.

Memo to Ms. White: You’ve already been left on the sidelines to the tune of a 100+% gain off the 2009 bottom. And you haven’t been earning interest on savings for years.

 

Her reply:

We have better advice, we’re better diversified, and I feel like we can tolerate a little risk.

I don’t know if I should wish their advisor luck, or petition the SEC or the state regulatory board that governs him to sanction him for malpractice. Of course, these are two physicians, which means they have the economic and intellectual heft to intimidate most advisors, even if they are completely governed by their emotions when it comes to their money. For Ms. White and Mr. Villa, a dermatologist and reconstructive surgeon, respectively, perhaps a few visits to a psychiatrist may be in order more than a relationship with a financial advisor.

 

 

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[SIUYA 11]

There is soooooo much one could say about this - from commenting on market timing, buy and hold, the money management industry and professional advice and advisory firms, issues around fear or loss and fear of missing out, get out when the doctors and taxi drivers get in etc its f....n ridiculous.

 

So I think i will leave it with a quote from my favorite philosopher

 

“I’ve got plenty of common sense…. I just choose to ignore it.”

- Calvin and Hobbes