Investing Lessons from the Turkey (you ate yesterday)

Add comment November 23rd, 2007

 Brent R. Brodeski, MBA, CPA, CFP^®, CFA, AIFA^®

Investors are much like turkeys!  The good news is we can learn from their experience before we too get our heads chopped off!  To understand, let me first tell you about the day in the life of a turkey.  When they first crack out of their shell, they are scared.  They’ve been separated from their moms.  They awake under incubator lights and are quickly greeted by big, scary looking humans.  They are quickly herded off to pens with other confused and scared little turkeys.  But after a while, as they fatten, the humans don’t seem so scary after all.  In fact, like clockwork, each and every day the scary humans bring them food.  They start to actually like humans.  By the time October comes around each year, they look forward to spending time with humans.  Why the heck were they so scarred?  How naïve they were!  Humans are nice people that let them play all day, bring them food and keep their pens clean.  Of course, at the point they are most confident, they’re duped.  We eat them for Thanksgiving dinner!  It turned out that the risk (of losing their head) was greatest at the same exact moment they were most confident.

Too often investors act like turkeys.  They pay close attention to recent events.  When markets are on a roll (i.e. 1999), they get fat and happy and their confidence grows.  They question why they own any bonds.  They might even call their financial advisor or banker and suggest it’s time to buy technology funds or the NASDAQ QQQQ (since it is a low risk investment that only goes up).  In fact, the banker might offer them a newly minted technology fund before they even get around to calling!  Investing is easy!  And, obviously, it’s different this time.   It is a new paradigm.  Unfortunately, you know the rest of the sad story.  Like the turkey, at the point of greatest confidence, investors lost their heads.  The NASDAQ fell almost 80%.  S&P losses approached 50%.

At the bottom of the bear market (three years later), wary investors fell into the same turkey trap.  It was March of 2003.  Investors were beyond depressed…  they were outright despondent (despondent investors just concede markets will never recover—markets are forevermore hopeless).  Three years of declines, bad news and scary stuff (perpetuated by the media) caused turkey-like investors to finally sell.  Enough is enough!  By selling (even at a big loss) you could at least salvage a bit of your portfolio.  By selling your stocks (minus the bankrupt dotcoms) you could start re-building your retirement fund.  If interest rates go up (a lot), you might even retire by the time you’re 80!  Sadly, we all know what happened next… markets rallied strong, right after turkey-like investors sold.  Paying too close attention to scary markets during 2000-02 caused investors to confidently make exactly the wrong decision—selling at just the wrong time.  

Of course, the 2000-02 bear market (and previous technology bubble) were extreme case studies of humans acting turkey-like.  Still, these lessons are easily adapted to today’s environment.  One month things seem to be doing well as the market coasts past 14,000.  It feels good.  Investors start to buy more.  Life is good.  Then, sub-prime worries re-surface—causing investors extreme angst. 

With recent declines and volatility you might now find yourself questioning the wisdom of owning stocks.  You might be tempted to bail out (or reduce your exposure to stocks) and sit in cash.  I suggest you re-consider.  Remember, prices are now cheaper than they were just two months ago.  Don’t be a turkey!  Don’t get duped by what’s happened recently.  Instead, stick to a long-term plan (in the long-term stocks go up) and avoid the temptation to focus on recent scary stuff.  And, just as important, don’t get too excited next time markets rally.  Just remember… over time, markets go up.  And, in-between, they fluctuate.  Don’t let recent events, good or bad, affect your long-term strategy.  Stick to a balanced plan while ignoring the latest buzz.  In doing so, you just might avoid the butcher block!

(Footnote:  I borrowed the turkey analogy from one of my favorite books:  The Black Swan, by Nassim Nicholas Taleb.)