February 11, 2016
The Bull Session
When It Rains…
When was the last time you were watching TV and a special report broke in to say, “Weather forecasters predicted a 30% chance of rain today and it is actually raining! Water is coming down everywhere. It appears that one of the thousands of clouds in the sky today actually built up to a point that water has exploded from its shell and it literally raining down on the earth!”
I don’t remember that ever happening. When there is a 30% chance of rain I am just not surprised if it rains. I don’t spend a lot of time trying to figure out how it happened. I accept it and move on. If I am lucky I have a raincoat, an umbrella, and some decent shoes at the house that I can wear to minimize the effect of the rain and I continue on with my plans.
That type of reporting doesn’t work very well in the investment world. We have newspapers, magazines, and multiple cable channels that are dedicated to explaining to the general public what just happened and why it happened. They can’t really afford to get on the air and say, “Well, nothing unusual has happened today and there really isn’t anything to worry about. The equity markets are down a good bit lately, but that happens a lot. Equity markets are down about 30% of the time…so …well…that’s really all there is to say.” Next thing you know people are switching channels and watching Days of our Lives so they can get the drama they so long for or they are reading People Magazine instead of Fortune.
So, the investment industry has become very good at taking actions in the markets and analyzing them to death. They get very smart people to tell us exactly why things have happened the way they have. An investment committee member of a foundation told me earlier this week that he was confused. He said that a while back the experts were saying that the markets were going down because oil prices were too high. Now they are saying that the markets are going down because oil prices are too low. It does get confusing. Many experts say that this recent downturn was triggered by news that China wasn’t doing as well as we had thought. That’s interesting since we have known for fifteen years that China was propping up their economy through government intervention that was unsustainable. How could that have been such a surprise that our markets decided to react to it in the last week of 2015?
Markets go down when enough investors decide at the same time to protect their gains by selling their positions and not enough people are there to buy those positions. Systemic issues matter over time, but the fact is that our equity markets were overdue for a 10% correction so it shouldn’t be a surprise that we are in one. What the financial media does so well is give you a lot of accurate information that is really not that important to your decision making process and they make you believe that it is very important. Using unimportant information to make important decisions can often produce bad results. Remember Rule #12. “Fight the Noise”. And remember that sometimes when it rains it’s just because we are due for some rain.
Scott Reed, CIMA®, AIFA®
CEO of Hardy Reed, LLC