A Vital Capacity for Dogma

August 19, 2020

by Zack Johnson

I begin each weekday morning with a cup of coffee and a walk outside to pick up a copy of the Wall Street Journal filled with yesterday’s news. In an age of click-getter headlines, I have always appreciated getting the news in an old-fashioned, de-sensationalized accounting of 12-hour old events. While it is imperative that I stay up to date on financial markets, the economy, legislation, and other relevant news topics, maintaining a functional mental capacity is imperative for pandemic survival! During the climax of the shutdown panic, I began to introspect how even a relatively benign version of the news was impacting my functional capacity as an advisor. As such, I took note of the market headlines from the Wall Street Journal that were awash in negativity. My conclusion: Most successful investing is done despite financial journalism’s best efforts to convince us that the global economy, the financial markets and the very fabric of society are as bad as they’ve ever been right now and will continue to get much worse! In all fairness, during the times of social nearness yore, the news de jour could be counted on to construct a senselessly negative spin on U.S. equities as its fuel has always been the provocation of fear.

I have compiled a sampling of these headlines that appeared in the Wall Street Journal beginning at the best entry point for investing in U.S. equities so far this year. As of the date of this writing, this entry point was on March 23rd which found the S&P 500 down 34% in 33 days. For a select few, I have highlighted some of the ‘frightening blurbs and other absurdities’ gleaned from the articles.

March 23rd (S&P 500 @ 2,237): The Worst of the Global Selloff Isn’t Here Yet, Banks and Investors Warn
“Bank of America Corp. believes the selloff might not ease until the S&P 500 hits 1800—a 47% drop from its February record.”
“Selloffs end when the problem that caused the selloff is under control,” said Michael Kantrowitz, chief investment strategist at Cornerstone Macro.

March 24th (S&P 500 @ 2,447): Markets Meltdown at the Fastest Pace Ever
“As fast as the downturn has been, many fear the worst has yet to come.”

March 26th (S&P 500 @ 2,630): Stocks are Still Pricing an Optimistic Version of the Coronavirus Crisis
“A bounce in global equities has left the S&P down by 23% for the year. That is a lot, but investors might want to consider whether it could get worse.”
“Of course, it isn’t impossible that the bottom has been reached.”

March 28th (S&P 500 @ 2,541) Where Markets Go from Here: Wall Street’s Biggest Names Weigh In
“We are running the risk that this will be another Great Depression. Despite the good intentions of the Fed and policymakers in Washington, the programs put in place won’t offset a severe contraction in economic activity. I expect another 10-20% downside in equities, and double-digit high yield default rates within 12 months.” —Scott Minerd, Global Chief Investment Officer, Guggenheim Partners
“Hell is Coming.” —William Ackman, Pershing Square Capital Management

Mr. Ackman apparently believes his prowess in market prognostication grants him an expertise in eschatology as well.

April 23rd (S&P 500 @ 2,797): Jobless Claims Swell by 4.4 million

April 29th (S&P 500 @ 2,939): U.S. Buys 100,000 More Body Bags, Preparing for Coronavirus Worst

June 7th (S&P 500 @ 3,193): Will Stocks Trail Bonds over the next decade?
“A new analysis suggests there is a decent chance that will happen.”

August 7th (S&P 500 @ 3,351): U.S. Covid-19 Death Toll Tops 160,000

The toil that unending briefings like these take on one’s psyche and ability to execute on an investment strategy are immense. For many people, our present-day news invokes, at best, paralysis, or at worst, the abandonment of a sound long term investment at discount prices. While only retrospect makes it possible to identify a recent market bottom, it should be pointed out that the S&P 500 has increased by more than 50% since March 23rd.

Over the next 3 months, investors will be inundated with even more headlines related to the general election on November 3rd. In a follow-on correspondence, we will provide more granular data and insight on investing during election seasons. For now, let’s reflect on how we can apply the truths we’ve learned from the first part of 2020 to the upcoming months.

  1. Exactly NONE of the well-intentioned ‘experts’ forecasted the rapidity of the initial market decline.
  2. The same number of experts predicted that the days following March 23rd would be the best 50 days in U.S. stock market history.
  3. These same experts, whose views will be unavoidably tinted by their own political lens, will be soliciting their market outlooks in the event of either a Biden or Trump victory.
  4. Due to confirmation bias, you, me and everyone else in the world will have an unrelenting natural tendency to ONLY seek out information that supports our beliefs and corresponding election outcome market theories.
  5. This will have an exacerbating effect on our dogmatic surety of global misfortune should the opposing party be elected/re-elected to office.
  6. Unchecked dogma may cloud our ability to make intelligent investment decisions. Instead, we may resort to investing based on fear and emotions abandoning the basic tenets of successful long-term investing.
  7. Our tenets of investing are defined as:
    1. Over time, equities & real estate prevail at creating and maintaining wealth far better than cash and bonds.
    2. The primary purpose of cash and bonds is to maintain stability in a portfolio for short to mid-term needs so that one is not forced to fire-sale equities in the event a market downturn coincides with personal financial needs or opportunities.
    3. The short-term direction of the market cannot be consistently predicted which means that the only way to be assured that you capture the excess return of equities is to ride out their periodic declines.
    4. Historically, these declines have always been temporary.
  8. Self-evidenced by what we collectively just experienced, the short-term direction of the economy and financial markets is entirely unknowable.
  9. Therefore, we must actively defend against allowing this near-term guesswork to affect our long-term investment policy.
  10. If we can’t see this clearly now, it is unlikely that we ever will.

The late avant-garde musician Col. Bruce Hampton penned a song on his album Strange Voices entitled “A Vital Capacity for Dogma” which I chose as the heading for this timely message. In my recent conversations with our clients on both sides of the aisle, there are real and valid concerns about personal health and safety, our economy and racial reckoning. Further, the virus has claimed the lives of dear friends and family members of several people under our care. Uniformly, genuine care for our shared future is what stands out across my conversations with our clients. However, we are all driving through the ‘fog of unknowing’ and are forming strong opinions on which turns will lead us to our desired destination. There are competing viewpoints on the health risks of the virus and prevention of its spread, a shared sense of racism’s evils, but polarizing views on how to fix it, and for our purposes, bullish and bearish investors, whose opinions are predicated solely upon the outcome of November’s election. I propose that we eradicate political dogma from our investment policy, lest it reach its vital capacity! Your portfolio may thank you for it one day.

All investments carry risk, including the potential loss of principal. No investment strategy can guarantee a profit or completely protect against a loss.