I have heard and read about bear markets, but I have never experienced one with ‘skin in the game’ until April. Everything I heard and most of what I read does not even scratch the surface of what I just experienced. Bear markets engulf investors in fear, loss, anxiety, panic, and regret. I experienced all these emotions.
Background: The Escalator Up
On March 9, 2019, the stock market passed the 10-year milestone from its 2009 lows. This bull withstood punches from all over the globe. A U.S. Federal Government credit rating downgrade, European sovereign debt crisis, U.S. – China trade war tensions, Brexit, and interest rate hikes to name a few. With bumps smoothed along the way with quantitative easing (QE), tax cuts, and the daily expressions of optimism from economists; most individuals began to think the longest bull market in history was invincible.
On February 12, 2020, the DJIA, the NASDAQ and the S&P 500 (all major stock indices) finished at record highs. (The NASDAQ and S&P 500 both reached subsequent highs on February 19th).
These highs were short lived.
Bear Market: The Elevator Down
In less than two weeks from the February 2020 peaks, major stock indices were in freefall. Bear markets, defined as a decline of at least 20%, occurred in the S&P 500 (16 days), DJIA (19 days) and NASDAQ (17 days). Since entering the bear market, each index dropped between 32-39% before bouncing.
In 2009, our country emerged from the Great Financial Crisis (GFC). Despite the accusations and finger pointing that occurred, markets declined, homes were lost, and many jobs disappeared. I personally do not recall the turmoil from the subprime lending crisis. I was insulated, sitting in a desk in ninth grade Math and English, and periodically escaping pranks from my football teammates. This put me at a slight disadvantage by not having a first-hand experience of facing the 2007-2009 bear market. Eleven years later, I am sitting behind a desk at LeConte Wealth Management. My position provides me an up close and personal experience of what truly occurs in a bear market.
As a rookie facing my first bear market, here are the top 5 things I learned:
1. The trusted adviser earns their keep, but it is quickly forgotten
“Where there is no guidance the people fall, but in abundance of counselors there is victory” Proverbs 11:14.
As the Good Book points us toward wise counsel, I believe this principal should flow over into every aspect of our lives. Throughout the past two and a half years of my professional career I have heard a lot. I’ve heard clients talked down from mortgaging their home to chase a “golden ticket”, I participated in meetings where we had to help clients understand the sacrifices that needed to be made to stay retired, and we’ve helped clients wrangle their emotions to avoid common investor behavioral mistakes – like chasing a hot market and selling when things underperform.
Human emotions are real, and they can swing to the extremes in a hurry. I was able to see the power of how a trusting relationship with an adviser can provide a practical approach to help individuals and families stay on the path toward their goals. Unfortunately, clients tend to quickly forget the value of a sensible approach that advisers provide in these situations.
I would encourage every investor to seek wise counsel, because as much as we think being sensible would be easy to do; I have seen otherwise.
2. “What do I care about the price of beef when I want milk from my cows”
This quote comes from Farmer Frank, who is one of LeConte’s first clients. His words were etched in my mind from LeConte partner, Hoy Grimm. His farming wisdom applies perfectly to our approach of Purpose-Built Planning. Simply put, this is a reminder to keep the main thing the main thing. If your investment goal is to reduce taxes; focus on that. If your investment goal is to grow your investment; focus on that. Do not expect growth from income investments and income from growth investments. Farmer Frank has helped me learn a valuable lesson by learning not to change your long-term investment strategy because a short-term price change captures your attention (a.k.a. triggers your emotions.)
3. Markets can stay irrational longer than you can stay liquid.
This February, valuations crept higher and earnings growth slowed, but money kept piling into stocks. It did not matter what your money was invested in. It was like throwing darts at a board covered with triple 20s. I sat in a 2019 client review and every asset class they were invested in was up. This is what their response was, “Why didn’t I have more money in the thing that made the most. “Without recognizing it, they were asking us why you did not buy (allocate to) more stocks even as prices became irrational.
Bull markets produce this euphoric state in many investors and it certainly did in me. The irrational decisions others made in the market prompted me to follow suit with my personal holdings. In hindsight, I knew what was occurring as we had discussions almost weekly at the office about it, but my emotions overtook my sensible thinking. In their wisdom, the partners at LeConte did not give me trading authority for our client’s accounts. So… the harm was limited to my relatively new Roth. From this lesson, I will take the value of patience and strive to abstain from the herd.
4. “Be fearful when others are greedy and greedy when others are fearful” – W. Buffett
Markets can stay irrational both ways, as they go up and as they go down. Following the herd either direction is a mistake. Warren Buffett is the embodiment of disciplined investor behavior. His words above are contrary to the thoughts and emotions investors feel when markets drop 30% plus from all-time highs. Bear markets typically occur when fear enters the market and large “emotional” sell offs begin over a longer period. Throughout a bear market, volatility tends to pick up, which presents more fluctuation than the average investor can stomach. In turn, this creates the opportunities. Investors with a “greedy when others are fearful” mindset think about putting excess cash to work and rebalancing into better positions that will help reach longer-term goals. I saw this firsthand as we asked clients for more investment cash when markets were down to pick up positions at a discount.
5a. Recency Bias is real. (Be disciplined in taking profits)
This may be one of the hardest lessons I had to learn. I remember a year ago investing in an exchange-traded fund that was up ~36% in less than 6 months. It was quite incredible. I remember thinking there was no way the investment would slow down – it had to keep growing (this was a product of recency bias). “If only it could get to 40%; that’s when I will take some profit,” I told myself. Over the next 6 months, I gave back every penny gained, including some of my principal. Looking back, my first mistake was not implementing a rebalancing strategy. This would have helped shelter me from my emotions, kept me disciplined and ultimately kept me from learning the hard way.
5b. Is it for savings or for investing? (Bonus)
This is a question that every investor should ask themselves before they ever put a dollar in a security. Why? Two words, time horizon. Time horizon is a quantified length of time that an investor plans to hold a certain security based on a goal. In a situation that you have a question about whether you should invest, make sure you never put your savings in stocks. Do not be speculative with it. You do not want to be forced to sell your holdings while they are down 20%-30%.
I will leave you with this. Eighteenth century philosopher, Edmund Burke, stated the following, “In history, a great volume is unrolled for our instruction, drawing the materials of future wisdom from the past errors and infirmities of mankind.” As I move forward from the 2020 bear market, I plan to take Burke’s advice by learning from my past errors as an investor and continue to turn disadvantages into advantages. I encourage you to look back as I have done and reflect on what you could have done better. Draw from Burke’s advice and learn from the wisdom that has been unrolled in front of you.
P.S. If you are within 10 years of retirement, just make sure you are
not investing like a 25-year old before his first bear market.
