Sunday, October 12, 2008


How are individual American investors dealing with the financial tsunami? Apparently, they are not. Financial advisers report that many of their clients are not calling. Investors seem to be hunkering down and waiting for it all to pass.

Some are introspecting; some are licking their wounds. Some are asking what is wrong with the world; some are asking what is wrong with them.

The problem is what they are not saying. As Brett Steenbarger wrote on Traderfeed (link at left) last Thursday: "What I'm not hearing is re-evaluation of portfolios, plans for hedging, or thoughts about what the decline 'means.'"

Call it psychological protectionism; it is the usual first reaction to trauma.

Sometimes the impulse passes; sometimes it becomes a way of life. The latter can foster a cult of rugged individualism.

That, unfortunately, would recreate the conditions that made it so difficult for most of us to deal with the problem. Many of us got into this by trying to do it ourselves; we are not going to get out of it by going it alone.

Rugged individuals refuse to admit to being wrong; they are chronically averse to taking advice. Even if they have had some experience of working with a financial adviser, they have not spent the time and the energy to develop a relationship and to make an investment plan. Thus, when they think of picking up the phone they think that doing so would be a sign of weakness.

Recently, Steenbarger wrote than many traders would rather be right than rich. I would add another quality that we often see in rugged individuals. They would rather make their own mistakes than follow someone else's advice and make money.

When they see that their strategy is not working, they think that the market is asking them to touch it out. That way, they will become real men.

Admittedly, many investment advisers and coaches are out to sea. Why talk to someone who is also having trouble getting a handle on things?

Mainly because the conversation will help you keep your bearings and to make your way. Even if your adviser or coach does not have all the answers, talking with him or her will mitigate the feeling of being alone and adrift, buffeted by forces that no one understands. The one thing you do not want to do in a crisis is to go it alone.

After all, aren't we all in this together? Despite what Harold Bloom suggested in an op-ed in today's New York Times, self-reliance is not the way to go. It is a counsel of despair.

The myth of self-reliance, or the myth of the rugged individual, is at serious odds with reality. Successful people are never too proud to take advice. They did not get where they are by thinking that they know it all.

They are willing to do with it takes to achieve their goals, even if that means admitting that they are wrong, and even if that means taking counsel from someone else. You do not reach the pinnacle of the financial or any other world by making empty assertions of self-reliance.

In economic as well as psychological terms, successful people prefer free trade to protectionism.

In my October 7 post, "Hard of Soft?" I discussed the coaching practice of one Stephen Josephson, a man who counsels many high-level executives in the financial services industry.

One salient point that I did not emphasize is that people who have reached the summit of their profession-- like partners at Goldman Sachs-- are the first to ask for help. They do not resort to do-it-yourself-ist behavior. They know that they need an objective outside person to help them to reorient to a new reality.

By now, do-it-yourself-ism is baked into our culture. It is one of the reasons we ar having difficulty dealing with the current crisis.

Many of us believe that we are so smart that we can manage our own investments thorugh a discount or online broker. As you watch your savings and investments get washed away, will you be consoling yourself with the thought of how much money you saved in commissions?

While some people do know enough to manage their own accounts, most people do not, and should not even try. Besides, people who do know enough to manage their own money are in constant contact with advisers, counselors, and coaches.

They understand tht managing money is a job. Even if you have a financial adviser, you have to work at it yourself. Just because you can't do it yourself, don't assume that your adviser can.

Working at it is not the same as buying and holding a diversified portfolio of stocks or mutual funds. How many of us were lulled into complacency by the mantra that if we buy and hold, the market will always take care of us.

As we have learned over the past few weeks, the market is not in the business of taking care of us.

This same approach is manifest in the way company-sponsored retirement accounts are marketed. Employees receive precious little advice about how to manage their accounts. They are told, and even precluded, from managing their account actively.

The conventional wisdom is: no one can time a market; it is best not to try.

And yet, assuming that the market will do our work for us is a bad idea. Great value investors like Warren Buffett and Mark Mobius are not market timers. They are not traders. And yet, they must choose entry and exit poits with the greatest care.

While they are not day-traders, they are timing their purchases and sales according to measures of sentiment and value.

Of course, they usually know what they are buying, know what it is worthy, and know when something is overpriced or underpriced. They know this because it is their mob to know it.

If you own a stock or a bond, it is your job, in conjuction with an adviser with whom you have a working relationship, to know it too.

The invisible hand that moves the market is not necessarily a just and benevolent spirit. It does not practice fairness. Over time it rewards hard work, not good feelings.

If you work with the market, it will work with you. If you get lazy and assume that you do not need to work hard, it will probably punish you. You will neve learn how to work hard and to be successful if you do not have the humility to ask for and to take advice.


Unknown said...

As a formerly successful entrepreneur and now an active daytrader, I feel that I can't trust my future to others - I must be in charge.

This feeling was painfully strengthened by having lost a good chunk of change while relying on others to manage my investiments.

So now I go at it alone, with better than average results. And here is my question:

Does the fact that I'm reading your post (and many others) in search of good, usable advice makes me less of a rugged individualist?

Or am I still deceiving myself into thinking that I know best, even when my numbers confirm that assertion?

Truly, as a learned investor I believe that I have less and less to learn from many sources that have disappointed in their advice, and find very few that challenge and add to my knowledge.

As a result I am even more self-reliant, but that does not seem like a bad thing. What am I missing?

Stuart Schneiderman said...

Thank you, Roger, for your comments.

If you are daytrading successfully in the current market, more power to you.
Surely, there are people who daytrade successfully, but my guess that these are exceptional individuals.

In my position, of counselor, I occasionally will see someone who has taken a week-long course in daytrading and they decides to go for it. Personally, I tend to advise against such an approach, as I advise against people who are not actively involved in the market making their own decisions without having had the opportunity to consider the opinions of other, wiser, people.

It is obvious that you do your homework, that you have learned from considerable experience, both in business and in trading, and that you are still looking for good advice from multiple sources. In addition, you know how to separate the good advice from the bad advice.

All of this makes you intelligent, successful, and hard-working.

It does not mean that you really go it alone or that you think that you can do it all yourself.

The lesson you articulate is roughly the same one I was trying to discuss. If self-reliance means that after doing all your homework, evaluating the advice you have received over the years, you make your own decisions, then the term applies.

If, however, by self-reliance we are talking about people with minimal experience and knowledge of markets who are so thoroughly enamored of their own intuitions and impulses that they avoid advisors and refuse to do their homework then it would not apply to you.

Hopefully, that clarifies my point.

Unknown said...

Thanks for your response, it does clarify your point very well.

Interestingly, I didn't find in your writings any mention of pride or even hubris, in my view one of the sources of such behavior specially when coupled with inexperience or a dull state of mind.

Hopefully I will be able to avoid such presumption by staying humble, a difficult task after your compliments :-)