Since our earliest days walking the earth, the human condition is such that we all have an innate response to a situation we deem to be fearful. In years gone by; that might have meant the difference in one person’s versus another’s ability to co-exist or at least evade a wild animal intent on snacking on us as it passed us in search of other meal possibilities.
We still tend to judge the potential success of remaining in the current state through a “fight” response versus performing a quick calculation to determine that victory is less certain and choosing a “flight” response. The way that impacts investment decisions when physical harm is not what is in jeopardy is a purely mental exercise of whether to remain in an investment or even in the market at all or to not take any action, or possibly even to invest more heavily in the face of others becoming fearful. Warren Buffet has maintained, “when everyone is selling, I am buying. When everyone is buying in the euphoria of an up market, I look to sell.”
Looking at the following two charts, it may have seemed entirely plausible at the time to reduce one’s exposure in the market after Pearl Harbor, reduce one’s holdings as the country held its breath when JFK was assassinated, or more recently immediately following September 11th, 2001 or during this most recent recession of 2008-2009. However, as the chart shows – in each time period, the market recovered/is recovering.
What tends to happen within each of us is the belief that any one event is somehow categorically different than any prior event. The current event is then magnified in importance to the point that it skews how people view it in the context of all events. Beliefs that “this time it is different” or “we have never seen an event like this before” are shared and the general wave of hysteria increases. The reality is that if you look at the prior chart and table – we have experienced the worst and rallied past it in time. The often quoted Spanish poet, George Santayana, said, “Those who cannot remember the past are condemned to repeat it.” By looking at the charts and tables, it is clear that acting in a fearful manner flies in the face of what would be a good financial strategy. Perhaps the quote that encapsulates the need to resist “flight” responses when confronted by an unforeseen event was uttered by Franklin Delano Roosevelt when he said, “we have nothing to fear, but fear itself.”
If one accepts the lessons shared up to this point; that the market has seen and recovered from all kinds of one-time events, through the economic system of capitalism that opportunities are always being taken advantage of, and that one must anticipate and be prepared for a certain amount of volatility (meaning that while there will be gains accrued, there will also be times of losses, and that it is important to retain a long-term outlook and not react too rashly at a temporary blip or a small short-term reduction in value without assessing whether it is truly just the natural ebb and flow of the market or something that requires taking action); then the ability to counteract the fear that will crop up from time to time is essential. It is necessary to not lose sight of the fact that the investor is investing in the equity and debt of individual companies and not the market.
Succumbing to fear with no viable basis to do so is a path to reduced returns. Remember that major corporations with strong brands are best judged on the intrinsic value of the company over extended periods of time. Fear will cause more poor decisions to be made than an objective assessment of what is truly happening with any given investment. The investor must look beyond temporary systemic risk and volatility in the market and remember why the original purchase occurred.