Perspective | What’s the Best Way to Limit Damages in a Market Crisis? Take the Long View and Consider Doing Nothing
The rule of law. The rule of 72. The rule of three. Rules, rules, rules.
On his first solo album, Graham Nash asked the hippie generation: “Rules and regulations, who needs them?”
We all need them. Without rules, life would be short, unstable and brutish … well, more so than it is now. One good rule is: Thou shalt not murder. Here’s another, Rule Zero, which states: Do not be on fire.
In 2008, you will recall, the financial markets failed to obey Rule Zero. The global economic edifice quivered, cracked and began to crumble, because crooks and incompetents had taken command of sections of the markets, ignoring the rules. Greed became so widespread that it overflowed, and everyone was covered in the consequences.
When stock markets plummet, many investors follow the first rule of finance under such circumstances: Cash Is King.
Obeying that rule, after the insanity of 2008, many insurance and reinsurance companies, as well as other usually reliable organizations, sold much of their equity portfolio most of or all the way down to the bottom of the market. Few if any companies held on throughout.
When markets suffer serious falls, cutting one’s losses, bailing out and bolting for the side lines seem to be the only way a company can operate without class action suits from myopic stockholders.
I asked high-ranking corporate types why stockholders won’t stand for directors taking the long view. They cited quarterly performance, dividends, an excess of caution, maintaining stability in troubled times — stuff like that.
Stockholders are as dumb as nails, like everyone else. They panic when unexpected events occur and sometimes out of generalized fear. Markets rise and then fall. How they’re doing, and how you feel about it, depend entirely on your perspective and your position in those markets.
History tells us that if you take the long view, you will almost certainly limit your damage, eventually. Yet companies, like governments (for different reasons), can’t do that.
Insurers employ the finest minds a ton of money can buy; I’m just a goofy old geezer. Yet, since 2008, I have outperformed, investment-wise, many of the major insurers on a dollar-for-dollar basis, largely by doing nothing.
I took a different tack. In 2008, I knew what was going on and didn’t need to open my investment statements for a year. At the nadir, 70% of my life savings evaporated. I rode it out, stayed invested and recovered all my paper losses within seven or eight years.
Many people in business attire feel they have to be seen to be doing something, which is a summary of why so much in management, politics, government and almost every other avenue of human endeavor is so poorly executed. A lot of the time, the best policy is to do nothing.
Try telling that to your shareholders.
Markets are the sum totals of the people in them. Companies, ditto. But companies are not allowed to behave like the human beings who form them, so poor decisions are made by those human beings, trying to meet the absurd expectations of other human beings such as shareholders, bankers and insurers.
As a rule. &