1. To Our Clients and Friends,
“And today the market seems to be in just the kind of mood that would have worried Mr.
(Benjamin) Graham: a jittery optimism, an insecure and almost desperate need to believe that
the worst is over.
You can't turn off your feelings, of course. But you can, and should, turn them inside out.”
Jason Zweig, The Intelligent Investor (WSJ 05/24/09)
(Link to article: http://online.wsj.com/article/SB124302634866648217.html)
Last week I received via e-mail a very timely investing article from a good friend.
The article is quite interesting and insightful in delving into the manner by which we
as human beings and investors make some of the most important and impactful
decisions of our lives – those decisions involving money and, in turn, our families’
futures.
The article, by Dr. Robert Cialdini, postulates that two principles explain how people
abdicate decision-making to others under conditions of uncertainty. These principles
are Authority (external validation, rather than self-validation of an idea) and Social
Proof (when the approval of respected figures, rather than empirical evidence or
logic, dictates decision-making). In other words, if someone I respect endorses the
idea; I can comfortably abdicate responsibility for doing my due diligence and just go
for it. (Besides, a number of my peers are already doing it!)
As a guide for investors who hope not to get duped when the next Ponzi comes
around, this article holds more hope than practical value. The reason: we read
articles like this one with agreement and then must act (with discipline) through the
faculties of our left brain. Yet it is our right brain by which we are most easily
swayed to make the leap of trust and succumb to social influence or authoritative
endorsers. This includes influential friends and investment advisors. The more
positive alternative of asking the tough “why” questions and doing our own
objective due diligence is easily ignored.
It’s not coincidental that these same behavioral patterns move investors into the
market with hopeful anticipation when it has already peaked and out of the market
with fear and panic when it is approaching a bottom. Herd mentality, which is the
stuff of market self-perception in the short term, becomes its own self perpetuating
prophesy. Short term market behavior, regardless of the underlying economic
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2. fundamentals, is always simply the sum of many individual human irrationally
moving parts.
We are now living through a real-time scenario that is illustrative of Dr. Cialdini’s
hypothesis. Investors are buoyed by a bear market rally that is supported by
positive “green shoots” of economic news. Media commentators and advisors
(authority) help us to believe that this is signaling the imminent recovery of the
economy. This all very much reminds us of the story of the Emperor and his new
clothes. We are constantly reminded that the stock market is, after all, an historic
6 month leading indicator of all real economic recoveries. However, at this stage,
the emperor may look good, but it is debatable whether he is actually clothed.
Let’s examine the market’s perception from the media versus a few economic data-
based facts:
• The trillions of dollars pumped into the banking system are loosening up bank
lending – finally! (Reality: the money isn’t being lent fast enough to make a
difference. It’s still trapped in the financial sector, where it cannot
meaningfully impact the business of doing business as it was intended.)
• There are definitely “green shoots” of recovery out there. (Reality: True,
however the International Monetary Fund (IMF) calculates that the actual
U.S. and European bank losses related to this credit debacle may mean that
another $1.5 trillion in losses is yet to hit the balance sheets of banks.)
• The current rally began on great news that Quarter 1 U.S. bank earnings were
surprisingly good. (Reality: the environment created for them by the
government was equivalent to reducing the cost of goods to zero for one of
our car manufacturers; and then buying a couple of million cars from them –
courtesy of the U.S. tax payer. The earnings reports that triggered this rally
were due to taxpayer largesse and accounting alchemy; not the result of the
economy suddenly and miraculously reviving itself.)
• The data cited above is drawn from Neils Jensen’s Absolute Return
Letter, May 2009*, via John Mauldin’s Outside the Box newsletter.
The “green shoots” of recovery are real, and are indeed a hopeful and positive sign;
however that does not mean that the current rally can or will become a real bull
market without a lot of underlying healing and purging taking place in the forest of
the global economy. “Green shoots” appearing in the wake of the waste of a
devastating wildfire do not turn the forest green over night. Nor does the ecosystem
(GDP growth drivers and markets) which a healthy forest supports return to normal
any time soon.
It’s best to try understand the forest conditions beyond beneath the “green shoots”
of the first new signs of life we are seeing before deciding to buy and move in to our
dream home there.
Eric
Eric D. Bruck, CFP®
Principal
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3. Silver Oak Wealth Advisors, LLC
12121 Wilshire Blvd., Suite 1300
Los Angeles, CA 90025
Tel. (310) 207-4800
Cell (310) 890-2610
Fax (310) 943-0398
Reply to: ebruck@silveroakwa.com
Website: www.silveroakwa.com
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