Lullaby Part 2: Pressure

Here we present the second installment of our three-part blog entitled “Lullably: The Financial Markets Tease Us Back to Complacency”. This piece takes a retrospective on the market over the past three years, while offering a progressive commentary. After publishing the third installment, the entire article will be made available in pdf form. Make sure to check out Part 1: We’re Only Human.

Enter 2009.  We experienced a classic example of how markets behave and why we can’t figure them out.  As the market began to recover losses from the credit crisis, nobody believed there was any reason for optimism.  At the beginning of the year, stocks like General Electric were trading at unbelievable levels and economic news remained bleak.  In a short time, we have seen the market make gains of over 35% from the lows, yet just before the rally the media was filled with comments such as:

                 “The economy is still declining. Credit isn’t coming back. Unemployment is rising, and we are seeing a much less robust consumer. I think the market at some point is going to give back a large portion of these gains.”

—E.S. Browing

“Is the Bull Run Pulling Up Lame?”

 – Michael Farr, president of Farr, Miller & Washington. Wall Street Journal, June 22, 2009

“The US economy appears doomed to enter an enduring episode of unimpressive growth.

 —David J. Lynch, “US May Face Years of Sluggish Growth,” USA Today, May 8, 2009.

Unfortunately, herein lies the danger: Mr. Browning and Mr. Lynch were right.

Going into the fourth quarter, many high-earning executives were subject to further lay-offs.  The business owner, left with no other options, closed up shop and waved the white flag.  When things are bad, we like to point a lot of fingers and yell at the top of our lungs: “Why didn’t anybody see this coming?” Conversely when things have a sense of euphoria, even when we are waiting for the other shoe to drop, we don’t think much of it. But why does this matter?

We are not wired correctly to be successful investors. We seem to thrive on buying and selling based on emotion rather than taking a prudent course of action.  The problem is that the financial services industry is wired just as poorly as the investors it serves.  Some of the most irresponsible people in these uncertain times are the same professionals we turn to for help.  However you must understand that it is through no fault of their own.

In general, the industry has responded to investors’ demands to know what’s happening next.  Some professionals make bets, hoping to make a career out of being right, without regard for the consumer should they be wrong.  Other professionals are simply trying to recover their clients’ (and their own) lost fortunes by taking on more risk than would otherwise be prudent. Many advisors have begun taking a more conservative approach in the face of the “new normal”, however, this move came after the fact, and their clients will never have a chance of participating in the upside markets eventually provide.  The pressure is as great on the advisor as it is on the investor.

With a temporarily good market lulling us back to complacency, the desire to make portfolio adjustments, or take a serious look at things most investors need is once again being put on the back-burner as business owners and executives turn back to focusing 100% of their energy on the survival of the company.  But what can one really do anyway?