by Bryan C. Taylor, CFA
Whoever disregards discipline comes to poverty and shame - Proverbs 13:18a
Few people we talk with these days have much positive to say about the stock market, the economy, or even the direction of our nation. Recent events have done little to reassure us that the future is indeed bright. A slow-down in China, outright recession and a possible break-up of the currency union in Europe, military strife in the Middle East, and slow economic growth coupled with high unemployment here at home do little to inspire confidence in the average American. For many of us, the upcoming election and potential “Fiscal Cliff” underscore the challenges faced by America. Much of this skepticism and the incipient malaise may be attributed to the high and, in many cases, rising jobless rate around the world. In his book, The Coming Jobs War, author Jim Clifton writes: “What the whole world wants is a good job.” As the CEO of the renowned polling organization Gallup, Jim is uniquely qualified to comment on the state of “wellbeing” in the world at large and particularly in the United States. Another Gallup index, the Gallup Healthway’s Wellbeing Index suggests that while the number of households listed as “thriving” has actually increased during this expansion, a large and growing number of households are recorded as “struggling”…not particularly good news for a consumer driven economy. In light of this information and a decade of below average equity returns, it is no wonder that investors are skeptical about the future.
The problem, as we see it, is that this negative state leads to investment paralysis and extreme pessimism among investors. Often, when events are at their gloomiest investment opportunities are at their greatest; Baron Rothschild once noted “Buy when blood is running in the street”. Despite the knowledge that contrarianism can produce positive investment results, many investors fail to invest in this fashion. In this, investing is similar to other areas of our life…we know that we should forgo that piece of pie or our weight will continue to rise but we can’t seem to help ourselves. Discipline, in any endeavor, is difficult to accomplish. Consequently, we are prone to vacate the market just when we should be buying, or buy gold because everyone else is buying, or pursue any number of other investment fads. However, when it comes to disciplined investing Institutions have a distinct advantage. Policy and bureaucracy can be wonderful proponents of inertia, not a bad substitute for disciplined investing, if you think about it. Some wag once quipped, “a camel is a horse designed by a committee”, but committees can serve a useful purpose. A well-defined, consistent, investment policy statement adopted by a committee is difficult to change. When individuals get scared and pull their funds out of the market or chase the latest investment craze, the investment policy and bureaucracy limits the speed at which an institution can react. In today’s frenetically paced environment this lack of “nimbleness”, as it is termed, often seems a disadvantage. However, such stodginess can actually be an advantage. A properly crafted policy statement allows an organization and its adherents to avoid investment fads and focuses them on the true objectives of their investment program. Ultimately, this is why we invest, to achieve future financial objectives. In fact the achievement of these objectives not only requires that we invest but also that we accept the risk associated with such investment. In these difficult and uncertain times, when it is easy to rationalize sitting on the sidelines, an investment policy forces us into disciplined, contrarian, and hopefully profitable investment alternatives while protecting us from short-term emotional decision making.