By |2021-04-05T05:24:50-04:00June 29th, 2017|Blog, Great Investors Series|

“Even if you could trick an algorithm into giving you the portfolio you need as opposed to the one you want—which you can’t—an algorithm can’t hold your hand, look into your eyes and advise you credibly not to worry when the market goes down 30%. You will still bolt out of your portfolio at the wrong time and for the wrong reasons.”
– Nick Murray

In last month’s article, we focused on “Taking advantage of Dividends” as one of the great qualities to adopt for anyone who wants to become a great investor. This month we focus on slightly different habit that great investors understand……Great Investors Don’t Listen to Robots.

The 80/20 Rule

Most of us have heard of the “80/20 Rule”, an observation by Italian economics professor Vilfredo Pareto, who noticed that 80% of the land in Italy was owned by 20% of the population, and that 20% of the pea pods in his garden contained 80% of the peas. These observations formed a principle that, in most endeavors, 80% of the results come from 20% of the efforts.

After many years of observing the investment markets and investor behavior, we have noticed a different kind of “80/20 Rule” at play in the investment markets over a long period of time. Specifically, we have observed that:

  • 80% of the trading days, the stock market experiences relatively low volatility, with a slight upward bias. Investors are calm and rational during these periods, and investing is relatively easy for most investors.
  • 20% of the trading days, the market experiences a great deal of volatility, either to the upside or the downside, and investors suddenly become quite emotional, either with extreme fear or euphoria. Investors are anything but calm and rational during these times, and are prone to making big mistakes.

During the “emotional 20%” of trading days, investment volatility has a way of bringing out the worst of investor behavior, and we all have a tendency to fall back on our hard wired proclivities to make the exact wrong investment decision, at the exact wrong time.

It’s Easy 80% of the Time!

Over most of the years of my collective advising experience, the majority of the trading days have been “pleasantly boring”. Stocks rise and fall on a daily basis, but usually by a small fraction of one percent. On an annual basis, stocks are up most of the time, usually within range of the long term average of 10% per year. Trading is not exceptionally volatile for significant periods of time, and investors are able to quietly and calmly build their portfolio values.

During these periods of relative calm, investing begins to seem easy, and investors tend to become complacent. It seems that all one has to do is set up an intelligent portfolio allocation of stocks and bonds, with the proper asset class and sector allocations, and let the markets do the work for you. Simply review your allocations a couple of times a year, and sleep soundly at night knowing your portfolio value is growing slowly over time.

It is during these times that investors begin to seek simple, inexpensive, “no frills” solutions to their investing needs. Since investing seems so easy, most people reason that all they need is a pie chart or an algorithm to help them achieve long term investing success. The latest version of this is the rise in popularity of “Robo Advisor” platforms, in which investors pay a fee to have their portfolio managed by a “robot”: simply complete an online profiling and risk tolerance questionnaire, and the “robot” spits out a recommended portfolio allocation, which will be automatically rebalanced on a regular basis”.

Easy as pie – investing is so easy even a machine can do it.

The other 20% of the Time

In our years of experience, 20% of the time conditions have been not quite so boring, as volatility returns with a vengeance, and stocks experience violent movements in both directions. Markets begin to appear chaotic and unpredictable, and people do all sorts of self-destructive things when their emotions take charge of their investing decisions. There are 2 primary categories of emotional investing mistakes, and recent history offers textbook examples of each.


Historically, the late stages of a Bull Market produce the best returns.

When a new Bull market begins, investors are tentative at first. The memory of the last Bear market is still somewhat fresh in their minds, and so they invest selectively and cautiously. As the Bull market extends into multiple years, investors get used to the good times, and begin to forget about risk. They become bolder and more aggressive with their investments, which can often drive eye-popping returns for the market as a whole, or the “darling” sectors that investors crave most.

The first fatal investing mistake comes from the high of investing euphoria during times like this. Investors begin to believe that the risk of losing money in stocks is zero, and that the only risk is that someone else somewhere is making more money than you are. Investors are consumed by the need to scramble at all costs, to own the same thing that is getting everyone else rich, and fast, before the party is over. People expect that stock prices will appreciate at a rate of 20%, 30%, 50% per year, indefinitely into the future.

The “Dot Com Bubble” of 1996-1999 was a textbook example of a market in the grips of investor Euphoria. During that period of time it was not uncommon for new technology stock IPO’s to rise by 100% or more in a single day, and investors everywhere were operating under a common belief that stocks were ordained to increase at a rate of 20% or more per year forever.

There are scores of examples of investors who made fatal mistakes during this time, because they allowed their euphoric emotions to take over. Perhaps our favorite example was a doctor in California who was convinced that the stock of online pet goods retailer “” would skyrocket. Since he didn’t have any investment capital immediately available, he used his credit card to finance his purchase of a large position in the stock.

Inevitably, the great Bull Markets in history have all been slaughtered in a glorious melt-up of optimistic euphoria, as investors’ rosy views of the future don’t materialize, leading to widespread disappointment. Everyone knows what happened to the “Dot Com Bubble”, and went bankrupt in November 2000, leaving our favorite doctor with a worthless investment, but still owing a 16% APR on his large credit card balance.

Remember this guy…


One of the key features of a Bear market is that they are invariably accompanied by scary headlines of all sorts of economic and financial crisis: bank failures, weak employment, declining economic growth, stagnant wages, and diving home prices are all common features of a Bear market. The news is all bad, and it feels like the end of economic life as we know it. The second fatal investing mistake comes when we experience the depths of investing terror during times like this. Investors experiencing terror believe that the markets, the economy, the world – are doomed, and nothing can save us. Equity prices will never rise again, and the only thing that matters is the safety of capital at all costs.

The “Financial Crisis” of 2007-2009 was a textbook example of a market in the grips of investor Terror. The events of September and October of 2008 are almost too painful to recount: Bear Stearns and Lehman Brothers, both multigenerational fixtures of the global financial landscape, went bankrupt overnight. Several other important institutions such as Merrill Lynch, Morgan Stanley, and Goldman Sachs, were hanging by a thread. A significant Money Market fund “broke the buck”, and traded for a price below $1, which was unheard of in the Money Markets. Global stock markets cascaded in a sharp decline not seen since the Great Depression.

There are scores of examples of terrified investors who made fatal mistakes during this time. In particular, stock investors sprinted for the exit doors, even as the stock market was hitting generational lows, which may never be seen again. In 2008, investors understandably sold their stocks in a panic, as the S&P 500 declined 38.49% for the year, and net outflows from stock market mutual funds totaled roughly $96 Billion.

However, in 2009, the S&P 500 made a multi-year low on March 9, 2009 just below 700, but then recovered strongly, climbing to 1,115 by the end of the year, posting a full year gain of 23.45%. However, investors kept on liquidating their stock positions, as net outflows from equity funds in 2009 were another $26 Billion.

For the next several years, the stock market enjoyed one of the greatest Bull Market runs in modern history, climbing to its current level of 2,400 for the S&P 500. However, investors were still spooked by the haunting memory of the last Bear Market, and continued selling their stocks despite the massive recovery going on:



Inevitably, the great Bear Markets in history have all died a quiet death as investor emotions hit the depths of despair, and conditions simply can’t get any worse. In the aftermath of the 2008 Financial Crisis, the S&P 500 has more than tripled in 9 years, in a historic recovery. Many of those investors who sold their equity funds in the depths of the Financial Crisis never got back in. Many others kept on liquidating their stocks well into the beginning of a new Bull Market, as the memory of 2008 proved too painful for them to “trust” the blooming new Bull. Despite a tripling in the S&P 500 over 8 years, investors sold stocks in 6 of the last 8 years, to the tune of a net liquidation of $251 Billion.


For 80% of the time, investing seems so easy that a robot can do it for you. But there are limits to what a robot can do.

When the Nasdaq is soaring, your neighbor just doubled his money in one day in a hot tech IPO, and all you hear about on TV and in the media is how the “New Economy” is a tree that grows to the sky, will a Robot convince you not to mortgage your house and dump it all into Dot Com stocks?

When the S&P 500 is down 57%, several prominent banks just went bankrupt, your neighbor lost his house and his job, and you just read a news story about a money market fund that failed, can a Robot convince you not to panic, and stay in the market?

No. Successful investing over the long term requires a great deal of emotional fortitude, and the ability to manage our behavior during times of great emotional distress. No robot can provide this for us – emotional fortitude is a human quality, which a machine cannot bestow. For investors who don’t possess that emotional fortitude on their own, Financial Advisors are there to help.

In the words of author Nick Murray:

Even if you could trick an algorithm into giving you the portfolio you need as opposed to the one you want—which you can’t—an algorithm can’t hold your hand,
look into your eyes and advise you credibly not to worry when the market goes down 30%.
Only a human advisor can do this for you – a seasoned counselor who you trust – not a machine.

Having a Plan

The very best investors have a disciplined approach to making portfolio decisions, and always stick to their plan, no matter what the rest of the world is doing. They always gear their investment program around the achievement of their most important life goals, and they understand the power of emotional control as the critical variable in their long term investing success.

No Pie Charts, and no robots. Just planning, patience and discipline, and healthy emotional control.

By |2021-04-05T05:24:50-04:00June 29th, 2017|Blog, Great Investors Series|

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