Wednesday, March 11, 2009

The strong do what they can, the weak accept what they must. In that case, be strong.

I was recently at a party held at a country western bar in, of all places, Rockefeller Center in the middle of midtown Manhattan. For the most part except for some kitschy decor the bar was indistinguishable from any other Manhattan yuppie hangout, with one exception. In the middle of the bar, in the middle of a ring with a padded floor was a mechanical bull. I had never actually been to a place where they had one and my friends and I were seated at a table next to the bull so we had a front row seat for the action and it was fascinating to watch.

Firstly the bull is not automated, there is a person manually manipulating the controls of the bull. Second, I had assumed that the way the game worked was that everyone got some fixed amount of time and the object of the game was to stay on the bull through your time and if you did you “won.” This was not the case. You could ride the bull for a long as you could stay on but sooner or later the bull threw you off and it was the turn of the next person.

Something about this bothered me. The game was fundamentally unwinnable. You could only lose more slowly than someone else. This seemed to me very unfair. Then it occurred to me why this bothered me so much, it is because this is what it seems to many people like what the markets are. They are a rigged game that you cannot win but you can only lose at a different pace to other people. Another friend has said to me that the thing about bear markets is that the foolish lose their money first and the prudent lose their money later but that sooner or later everyone loses.
I think this kind of mentality is unhelpful so I want to make a few points about how people should think about their savings and their future in the crisis.

1. Know Thyself
Far more important that knowing what will go on in the market in the future is to know what will go on in your own mind. This is surprisingly difficult for people to do. Many people do not consider how they will feel if they lose money. Look at your portfolio of assets and ask yourself how you would feel if before they could double they had to be cut in half but that you would not know when either would happen and it could be years before both or either would happen. Would you have as much invested as you do? Do losses bother you more than gains? Are you going to need your money soon? One of the problems with people listening to financial advice is that there is no one size fits all solution because every person has a different psychology about loss. The best example of this is Warren Buffets advice to buy stocks back in October. Over a 10 or 20 year time horizon, he’s almost certainly right but if you took his advice then you have lost 30% of your savings. Warren Buffet can wait it out, can you? So before deciding what to do with your savings you need to decide what kind of person you are, how much risk you want to take and how much time you have. Only then can you make rational decisions about what is right for you.

2. Acknowledge that there are things beyond your control
Something I see a lot of people doing is worrying about things that are fundamentally not in their control. This is a bad thing because by focusing on the things that go wrong that are beyond your control you are less likely to take actions that might help you. The analogy I use for this in my mind is what if you were an engineer responsible for building a bridge across a river. There are some things you cannot change. I call these the landscape. You can’t change the width or the depth of the river, the quality of the bedrock in the soil. These are things you have to take as fixed. There are some things that change and whose changes are beyond your control like the currents or the weather. The same is true about the markets and the economy. As an individual person you have no ability to delever the economy, you cannot affect government policy. You cannot make the stock market go up or down. Many people worry about these things and they are worrying and it is helpful to have an opinion about what the outcomes and timing of big economic trends are but excessive focus on things beyond your control can blind you to the things which are in your control.

3. Stay focused on the things that are in your control.
One of the best quotes from an Thucydides, “Peloponesian War” was given by the Athenian commander at Melos who told the Melians that “the strong do what they have the power to do and the weak accept what they have to accept.” What he meant by this was that might makes right but I think it is permissible to take it out of context for what it says about the mindsets of people. If you find yourself thinking of yourself as someone at the mercy of forces beyond your control you are actually less inclined to take actions which might limit the effects of those forces. If you focus on the things that are within your power and do them then you can put yourself in a much stronger position.

You cannot stop the stock markets from going down, but you don’t have to own stocks and you can buy puts. You cannot make the economy recover but you can limit your spending and pay down debt to prepare yourself for a downturn. You cannot stop the government from printing money but you can own real assets to protect yourself from inflation. You may not be able to prevent yourself from losing your job but you can always be planning for that contingency and mentally preparing yourself for it. These are very uncertain times.

The Athenians were right. The strong do what they can, the weak accept what they must. Be strong. Do what you can.

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