– Scott Reed
There are so many good quotes in the investment world. Baron Rothschild said, “Buy when there is blood in the streets, even if it’s your own.” Ben Franklin: “An investment in knowledge pays the best interest.” And Warren Buffett said, “Be fearful when others are greedy. Be greedy when others are fearful.”
I never thought my favorite investment quote would come from Tom Cruise. Tom played a young U.S. Navy JAG Officer Dan Kaffee in the movie “A Few Good Men.” When he is cross-examining Jack Nicholson, who plays Colonel Nathan R. Jessup, he presses Jessup too hard. Jessup doesn’t like to be pushed. Finally, Jessup looks him hard in the eyes and says, “You want the truth?” Kaffee replies, “I deserve the truth.” To which Jessup yells, “You can’t handle the truth!”
In our business, I have found that oftentimes investors can’t handle the truth. The fact is that it doesn’t matter what we say about hypothetical returns and what we think you can expect to make. In the real world, you can’t make hypothetical returns. Investors can only make what they are comfortable making. Emotional responses to what is happening with your investments dictates what kind of return you will have. If I ask you which portfolio you would rather have, one that returned 8% a year for the next 10 years or one that earned 6% over the next 10 years, it seems obvious that most people would prefer the one that averaged 8%. But with more return comes more risk, and with more risk comes more volatility. If you are someone who doesn’t like volatility, then you might very well sell out of the markets when they are down. Volatility happens on the upside as well. I have just rarely seen someone panic when their portfolio is going up more than they expected. But when it goes down more, that’s a problem.
What happens when someone sells during a downturn? They give up their opportunity to make up that loss. Warren Buffett also said, “Nothing is worse than a permanent loss of capital.” Emotional investing can lead investors into a cycle of buying high and selling low. You buy when everyone is excited, and the markets are high. You sell when everyone is depressed, and the markets are low. It is the exact opposite of what you should be doing, but it sure does feel right when you do it.
The truth is that evidence and a 100 years of data will tell you that markets rebound, that markets are up much more than they are down, that patience will be rewarded. It is easy to read and understand those words. It is much harder to implement a strategy based on those words. The truth is, to be a successful investor over a long period of time, you have to learn to ignore how you feel in the moment and trust your plan.
The truth will set you free, but only if you can handle the truth! Be careful out there.
