Lullaby Part 1: We’re Only Human

Over the next couple blog posts we will be doing a 3-part post 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.

We’re Only Human

The year 2008 was a tremendous wake-up call for so many of us.  For the normal business owner and C-Level executive, the economic downturn proved to be an event with permanent ramifications.  ”The New Normal” has brought an entirely new meaning to the idea of right-sizing and has cost many people their jobs simply so businesses could survive.

For the most part credit has evaporated, leaving business owners unable to stay the path previously traveled.  For those who still have credit available, the valuation of the underlying asset has evaporated, along with the ability to reinvest in the business.  What’s worse is that human nature leads us to focus on only so many things at once, so retirement accounts and rainy-day funds are largely ignored, and for the most part, merely a shadow of what they once were.  For those who actually paid attention to these accounts while still navigating the uncharted path ahead for their companies, the shock and uncertainty created situations where many simply reacted by changing their portfolios without thinking of the impact it would have.

As markets moved in a way that lead to the impression of recovery, those who made changes in the down-turn are again making changes with the hope that things will be okay; perhaps retirement goals will only be pushed back five years instead of ten.  Today’s stock market is creating a scenario where we are being lulled back into the basic instincts that cause investors to buy high and sell low.  Make no mistake; there are still sizable dangers that lurk ahead.  The question is at what point do we stop acting like it’s the same old song and dance?

As investors, we want to believe that we can figure out where the market is headed at any given time.  We are drawn to the flashing lights and bold promises of a “sure thing”.  Unfortunately we are not talking about a weekend in Vegas, but instead about the daily distractions we see all around us in the media.  Whether it’s the scrolling ticker on CNBC, the commercial touting the next great investment, or the blog our friends told us to subscribe to that’s telling us “now is the time to…”, we want all the financial successes we deserve, and we want to believe we can have them simply by paying attention to the information around us.

It’s this behavior that lead to the findings in the study titled “The Cost of Active Investing” by Kenneth R. French, a finance professor at Dartmouth.  In his study, Dr. French tells us that investors spend around $100 billion per year trying to beat the stock market.  Even worse, those most prone to chase these returns are the very business owners and C-Level executives that are already suffering in this economy.  These are the people that are accustomed to making decisions in business that have a direct impact on the success of the enterprise itself.  When they make a mistake, the good ones learn, adjust, and come out ahead of the pack. Instead, markets are not so kind and it seems the more we learn, the less we actually know.  It is a nearly impossible change in mindset for the successful business owner or executive to make. So where does that leave us?