“We’re such a reactive culture… It takes a certain strength to be patient and have a plan”
– Greg Berlanti
In last month’s article we focused on Patience as one of the most important mindsets which is absolutely critical for anyone who wants to become a great investor. This month we focus on a similar, but slightly different quality…Having a Non-Reactive Attitude
To become a great investor, one must be patient, as we explored last month. However, an important element to the virtue of Patience is the ability to eliminate reactive behavior from your investing strategy – to stop and think before you make decisions. The corollary of this rule is that most of the really important investment mistakes one can make usually come as a result of becoming emotional and impulsive about current events, and feeling a need to “just do something” at precisely the wrong time.
It’s too Early to Tell
The month of June provided a wonderful example of the hazards investors face when they impulsively react to world events, such as the news of the “Brexit” vote in late June. Dennis Gartman, one of our favorite market commentators, put it well when he wrote:
We are reminded of the comment by Zhou Enlai, Mao’s closest advisor and the Foreign Minister of the People’s Republic for a long period from the 60’s on into the 70’s, who said when asked his opinion of the importance and effects of the French Revolution that “It’s too early to tell.”
Zhou was absolutely right in making that statement for the great tidal shifts of history do indeed take hundreds of years. We are only now really beginning to understand the importance and the effects of the American Revolution in 1776, for there is no doubt in our mind but that that Revolution had an effect upon British voters last week, and we shall not fully understand what tectonic plates have shifted, or how, following last week’s Referendum, for decades into the future. All we are certain of is that the political tectonic plates have shifted. All we are certain of is that history has been changed and in the words of W.B.Yeats, “changed utterly.”
Indeed, our experience has demonstrated clearly that major world events such as the Brexit tend to have significant long term implications, but it is sometimes not immediately clear what those implications will be, or whether they will be good or bad. It often takes a great deal of time and further development of “The Story” before the implications become clear, and the proper investment actions become warranted.
The Fate of the Impulsive
Unfortunately, it is very difficult to remain Non-Reactive when the news is splashed with the horrors of the latest geopolitical development, and stock prices are acting chaotically. In the days following the Brexit, stock market trading became very impulsive and reactive, as investors fearfully ran for the exits, driving the S&P 500 down by roughly 5% in only a couple of days.
As is so often the case, following the initial reactive burst of market trading, there is usually a “sorting out process”, in which investors reassess the fundamentals, usually realizing that the immediate impact of the latest news doesn’t change the current picture all that much. Investors begin to understand that the implications of the latest news may take years to play out, and as a result trading tends to calm down, and usually establishes the same trend as before the big news. In this particular instance, those first reactive investors who sold their stocks when they were down 5% in 2 days were sadly disappointed, as all of those losses have since been recovered (and then some)!
In our investing lives we have seen a similar story play out time and time again. Events such as September 11, the Japanese Tsunami, and the Greek debt crisis almost always elicit an immediate reaction from investors, as the news is only “all bad” at first blush. However, the nature of these events is that their implications typically take a very long time to become clear. As the initial shock of the news wears off, investors usually return to their senses.
If fact, as we wrote recently (see: Turn off the financial news spigot) it may be best for most ‘non-professional’ investors to ignore the financial news all together. For many people, paying attention to financial media distracts them from their primary goals. We believe one of our responsibilities is to remove this burden from our clients. We have spent years learning how to control our emotions when the news of the day may test our resolve.
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 are not reactive or impulsive, and certainly do not let geopolitical events change their discipline or their plan. After all “it’s too early to tell”, so why react now?