This Too Shall Pass – The Cost of Being Out of The Market

Scott G. Kyle

March 23, 2022

This Too Shall Pass – The Cost of Being Out of The Market

The situation in Ukraine is horrific from any perspective on a humanitarian level. Having studied political science and international relations at Tufts University as well as The London School of Economics – and having spent a considerable amount of time in Eastern Europe including doing business in the Soviet Union during the time of glasnost and perestroika in the late 1980s and early 1990s - I certainly share what much of the world feels about this senseless war and tragedy unfolding before our eyes. While difficult to do, when assessing near and long-term finances, you have to be able to compartmentalize and look at investing from a highly rational, disciplined perspective. When you examine the facts, historical conflicts have tended to have a short-lived impact on US stocks and created opportunities for those who act (when it comes to their hard-earned money) based on facts, not emotions.

In terms of the current military conflict as a source for global tension and stock market price declines, if you look back at history, stock market recoveries from such events tends to be rapid, with the average time to recovery being under 50 days. The range of time to recovery from 20+ major conflicts from 1941 to present have been anywhere from 2 days to the longest (by far) of 307 days being the direct attack on the US (Pearl Harbor). While no one knows if the recent market lows will be the end of the near-term market volatility, US stocks having rallied strong last week, what we do know from decades of stock market history is that if you attempt to time the market and miss just a few of the best days in a year, your results can suffer materially. If you missed just 10 of the best days from 1999 to 2018, your gains were cut by more than half. If you missed the 20 best days over that 20-year period (as in if you missed on average just 1 best day per year), then your returns went from being strong to negative. The point is, being out of the market as it recovers can be very damaging to your financial future.

Thankfully, the current conflict shall pass, like all world challenges before it – be they economic, political, health, or otherwise. Those who have a financial plan and stick to it with patience and discipline will likely prosper. Those who succumb to the adage that the stock market is a mechanism for transferring wealth from the impatient to the patient, will invariably experience those financial effects accordingly. Remember, the job of a great Financial Advisor is not to try to attempt the impossible and predict short-term market swings and dart in and out at exactly the right time (in fact part of a well-trained Financial Advisor’s job is to keep their clients from attempting to time the market). Their job is to create and implement a financial plan that can withstand any and all events the world throws at the companies they invest in on behalf of the client (including allocating cash / short-term bonds to cover any near-term cash needs). It is during challenging times that professionals in any field tend to show and earn their worth, not when conditions are perfect, and everyone looks like a star.

Article by Scott Kyle

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The Hare, The Tortoise, and The Vulcan

I met Warren Buffett back in 1993 when he visited the business school I was attending. I had read several books on him which is why I had already decided to dedicate my professional life to helping others achieve their various life financial goals. One of the many pearls of wisdom he imparted that day was that great investors share one common trait which is not math skills nor some elusive predictive powers. Rather, the one characteristic above all others that separates the elite investors from all the rest is…wait for it…temperament. That is right, the thing great investors have is not something that can be learned but a way of behaving that is biologically based (according to Oxford).

If you think about it, most underperformance – most failures of achieving one’s financial goals – do not come from miscalculating the effects of stock buyback plans on share counts (most investors know little about their companies’ fundamentals, only recent price movements). Instead, it is how one reacts in the moment – either based on emotions and short-term considerations like the feeling of needing to be in control, or alternatively, based on objective long-term facts – that determines outcomes. All of this is driven by temperament. Most investors’ brains are wired to make decisions based on how short-term headlines and stock price movements make them feel. When news is bad and markets are down, they feel bad (sometimes even sick), and thus have strong impulses to act. The actions they take – selling otherwise perfectly sound companies to generate cash they don’t need for many years – typically puts them further from their long-term goals. But when they take action, they are not thinking about any of that: they are certainly not thinking about the long-term fundamentals of the business nor their finances 5 or 10 years hence. Only how to stop the emotional pain in the moment.

When Buffett was underperforming the broader market in the late 1990s, or again in 2020/2021 when growth stocks (as opposed to value stocks where Buffett makes most of his investments) were all the rage, how did the Oracle of Omaha act? Back in the late 1990s as Web 1.0 was taking hold, Buffett was considered a dinosaur by newbie investors. During the subsequent decade (the 2000s) when previous highflyers crashed and burned, Buffett handily outperformed the market. More recently, Buffett was again considered out of touch with today’s newfangled investment structures like SPACs (something he criticized) or technologies. Fast forward to late winter 2022 and BRKA was outperforming the broader market year to date by nearly 25%, let alone the ARK-type investments or SPACs, many of which were down 50% or more.

While I am not inside Buffett’s head, I am quite certain he was not panicking, not making decisions based on short-term considerations, during these periods of relative weakness. Rather, he focused on basics and the long term. It did not matter to him – he did not change his stripes – just because a few proverbial rabbits were racing ahead. Instead, he fine-tuned his Vulcan ears and made highly rational, disciplined decisions that have paid off handsomely for his investors. There is a reason he is worth about $100 billion more than the Reddit board trolls who have been criticizing him relentlessly.

The next time you are meeting with your Financial Advisor, check to see if he is sporting the sharp, pointy ears of a Vulcan. Then when – not if – the next bad headline, vicious market decline, or other gut-wrenching event occurs, you can sleep well at night knowing prudent decisions will be made on your behalf based on your long-term financial interests, not someone’s need to satisfy a short-term emotional itch.

Article by Scott Kyle