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Skepticism: What if the Market goes Down? An Excerpt from my Book

Skepticism is fine

You may or may not agree that stocks have been a wonderful place to invest. Many are skeptical about returns going back to 1802, and there are many good reasons to be skeptical. Keep in mind, however, that scholars who criticize the assumed rate of 10 percent since 1802 argue it is overstated by as much as 2 percent. Let’s agree not to quibble. Does it really matter to us if the number is 9 percent or 10 percent? Or let’s say even 8 percent?

So, that little penny your ancestor invested would have survived the great disasters that send others scrambling. As we’re even more aware of in our post-2020 world, disasters will happen. They have happened, and they continue to happen, and we can seldom predict them. That doesn’t mean we’re powerless though. What matters is how we approach and plan for them.

When I’m in Albany, on my way to the office, I frequently stop at McDonald’s, where I have coffee with the regulars, and often, our conversations turn to investing. Here’s what I take away about those people from many of our conversations. They worry. A lot.

If the stock market is going up, that’s a major worry because maybe it’s then going to go down. If the stock market is going down, that’s a major worry because how long is it going to stay down? The stock market goes up, and it goes down. If you don’t know what you’re going to do when that happens, you’re in trouble.

What if the market goes down?

That’s the fear with which most investors try to cope because, of course, the market will go down. It did that as I was writing this book. Yet, that anxiety and stress make it difficult to understand what that money is going to do over the years. Try not to think of life and investing in the short-term. The simple fact is if you are too cautious and too worried, you won’t lose, but you won’t win either.

I wasn’t born knowing this, but I had a desire to learn it, and now it’s part of me, as I hope it will be part of you after you read and think about what I share with you in this book.

Have a plan

One way to ease the fear is having a plan. Here’s an example of how we never know what’s going to happen at any particular time. A couple of years ago, I flew to Los Angeles to speak to a group of interventional radiologists. I had carefully prepared my twenty-minute talk. Just as I was ready to start speaking, the audio-visual system had a glitch, and as the technician came up to fix it, I stepped off the riser, missed the three steps, and fell. All I can say about that is if you’re going to fall off a stage, do it in a room of physicians. A swarm of them headed straight for me.

The other thing I can say about it is this. I had a plan—twenty minutes and a message to deliver. Was I shaken? Of course. Was I embarrassed? I’m sure I must have been. But I had a plan. I got back on the riser and delivered my message.

Have you ever watched a gymnast? I’m always amazed by the way that, when they make a mistake, as every gymnast does, they immediately regain their composure. Ice skaters are equally fast to react because they are anticipating that things may not always go that smoothly for them. They aren’t hoping against hope. They aren’t refusing to compete because it’s too unpredictable. They are planning ahead, and when something unforeseen happens, they return their focus to the now. The same is true of investing. You know much of the day-to-day is out of your control. So, in order to achieve the best results, you must have a plan and stick to it.

When people are fearful and stressed, they are looking for hope, which makes them vulnerable. Wall Street often tries to pacify us with the safest investment. Think back to the vacuum salesperson having the nerve to come back six weeks later with a new product. The new product may not be the best product long-term. Evaluating stocks—and people—takes time. Not all stocks, not all companies are the same.

Let’s head back to my morning coffee stop for a moment. When you stop at McDonald’s, you do so because you are strapped for time and maybe money. You don’t expect a gourmet hamburger or a five-course meal. You do expect, and you receive, a high degree of certainty. Everything tastes the same every time.

The recipe for success

There’s a difference between speculation and trying to make money quickly. Cheap stocks don’t get you quality for the long-term. When you look at stocks, you need to tune out the sales pitch of anyone who’s going to make money selling that stock to you—especially if that person tried to sell you the stock version of a vacuum cleaner not long before.

Here’s what you should look for:

● A company with little or no debt

● A company that is well-managed

● A company with a solid history of growth

We’ll come back to this repeatedly in the book because it’s crucial and because not everything that looks the same is the same. If we look at several individuals—where they live, what kind of cars they drive, their earnings over a year—they might all look the same. But if, at the end of ten or twenty years, we looked at a balance sheet, we would see that they are not the same at all. We’d easily see which individuals were raising their earnings and while doing that, were building net worth with little or no debt. That’s the recipe for success. When we find that company, that’s where we invest.

Short-term hope

Just as an individual can mislead you with all the trappings of wealth, Wall Street, advertising, and advisors with personal gain in mind can entice you into thinking you’re getting something you’re not. It’s easy to deny reality when the pitch you’re getting—the pitch that will make money for someone else right now—can be so much more appealing than the promise of what your money will earn for you years from now.

When you deal with Wall Street, you have to think about their objectives versus your objectives. Wall Street talks about what it makes, not what it makes for its clients. It pounds its chest like King Kong and talks about what it has done. Still, it’s not about how many clients they have, but how much they are earning for those clients. Wall Street’s objective is to make money. Our objective—yours and mine—is for us to make money. It’s about us as individuals.

As a rule, Wall Street makes more money than its customers do, something I was figuring out back in those early months of my career. Wall Street doesn’t own what it’s selling, but it gets paid selling it to you. They do that, in part, by selling you short-term hope. So, you have to think about their objectives versus your objectives.

Wall Street is short-term. You need to think about where you need to be throughout your life. That is not about what you can collect right now, but about where you are today and how much time you have to start using what you’ve stored.

Long-term, not short-term

People tend to invest when their confidence is at its highest. Yet, the time to invest is when you feel the least confident. In a piece I wrote in the depths of the recent financial crisis, I pointed out that in the crises that had preceded this one, the market always recovered rapidly and in a sustainable fashion. If you know you use a lot of paper towels, and if you can buy them at 40 percent off, why wouldn’t you do that and stock up? If you believe in your heart in the long-term viability that the market is going to average 10 percent, why would you ever consider selling? I’ve built my career on that belief, through good and not-so-good times, not to mention more than one financial crisis.

On Wall Street, nearly everyone’s selling you short-term investment strategies. That’s not because short-term strategies work. It’s because people pushing those strategies get paid in the short term. Unfortunately for them, their rewards and their clients will be short-term as well. When you are dealing with other people’s money, I believe strongly it must be designed to achieve the clients' long-term needs. The short-term is irrelevant.

From the beginning, I always understood there was a consequence in everything I did and every choice I made. I was always thinking what the cost was going to be. One of the things I realized along the way was I could do whatever I had to, but I wasn’t building a foundation. Only in the later stages of my career, did I realize how many years I spent in order to know what I’m talking about. I had to learn a lot along the way, and I did. One of the most important things I learned is that if you’re going to be honest, first, you have to be honest with yourself. It’s not do as I say. It must be do as I do. That’s probably one reason I never ask an assistant to get coffee or a sandwich for me. There may have been one or two times, but they truly were exceptions. Whatever made me announce at my first hiring ceremony that I couldn’t make money for my clients if I were selling them has driven my career.

In many cases, it’s not that old metaphorical vacuum cleaner with which I started this chapter didn’t work. It just needed time to work. Think about that and imagine what would happen if you simply held on to that purchase and watched how it evolved with time.

Here’s how you should look at the stock market:

● Remember that Wall Street gets paid on what they’re doing right now, not five or ten years from now.

● Don’t worry if the market is up or down; have a plan.

● Look for a company with little or no debt that is able to build equity

● Evaluate stocks as you do individuals who may look the same in the short-term, but they vary greatly in the long-term.

● Be suspicious if someone tries to get you to invest in something that sounds too good to be true.

● Ask yourself why Wall Street makes more money than its customers do.

● Know that Wall Street gets paid by selling to you.

● And ultimately, despite what the talking heads may be telling you, remember that successful investing is about time, not timing.