The Enemy in the Mirror
In July 2001, I retired from the securities industry at the age of 43. After 16 years as an investment advisor, research analyst, and portfolio manager, I had gone from a net worth of approximately zero to financial independence.
I was now free to do whatever I wanted, wherever I wanted, with whomever I wanted. It's called total financial freedom. And I can tell you from experience, it's a great feeling.
Unfortunately, not all my clients had become financially independent. This was not because I advised them poorly. As an investment advisor, I dealt with my clients honestly and gave them the best advice and service I could.
Yet, in many ways, they operated at a disadvantage. Some clients had a poor understanding of investment fundamentals. Others found it impossible to commit to a long-term investment plan. Many were simply too emotional about the markets, running to cash at the first hint of danger.
Then there was the other small matter of my firm's fee schedule. Investment professionals don't get into the industry because the work is meaningful but low paying. You become a broker, a financial planner, or a money manager to get rich. And most of us do, eventually. In truth, many investors aren't doing that well because their advisor is doing too well.
Contrarian instincts are rare, too, I learned. Few people are emotionally stirred by low stock prices. However, I am one of them. Every time there was a correction, a crash, or financial panic, my Scottish blood would surge, my pulse would rise, I'd rub my hands together, and start buying.
My clients often did just the opposite. They were more inclined to curse loudly, sleep little, and hurl epithets, some unrepeatable. Strong emotions like these are often a prelude to bad investment decisions.
Most investors don't realize that their biggest obstacle to success is not inflation, or bad markets, the taxman, or Wall Street. As Benjamin Graham wrote back in 1934, "The investor's chief problem—and even his worst enemy—is likely to be himself."
(Or, as the comic strip Pogo once put it, "We have met the enemy and he is us.")
Many clients, for example, would take a mental snapshot — if not an actual one — of the best statement they ever received. During market corrections, they would frequently remind me how much they had "lost in the market," failing to understand that nothing was truly lost unless they panicked and abandoned their equity allocation. They also tended to forget that their account would never have reached that high-water mark if they hadn't been invested in stocks to begin with.
I tried valiantly to get clients to increase their exposure to stocks during market downturns. The ones who did prospered. But, for many, hanging on was all I could get them to do. Adding to assets that were out of favor was simply out of the question.
Of course, when times in the market were good, many assured me they would welcome the chance to buy in a downturn. But that's when we were talking in the abstract. When the bear market actually showed up, they sang a different tune. "I never imagined that 'this' would happen!" they'd say in frustration. And, of course, "this" is something different each time.
Yet history demonstrates that common stocks are nothing if not resilient. That's why I refer to them as "the great wealth-creating machine of all time."
Yes, the economy will suffer the occasional recession. And the market will stumble. Expect it. Welcome it. After all, it's during down markets that you get an opportunity to buy what's cheap and prosper during the recovery that follows.
I'm talking rationally, however. Bear markets are emotional. They bring fear, loathing, and anguish. (After all, this is real money we're talking about.) But when these times come, recall that stocks give the highest long-term return because of the inevitable down periods you're bound to experience. In essence, you get paid to feel scared occasionally.
Embrace this and you're on your way to being a more successful investor. Remember, there's nothing wrong with feeling scared when the market swoons. As long as you don't act on those fears.