I was in San Diego recently, attending a conference. My wife and I decided to hang around a few extra days to enjoy the city and relax a little bit. We spent one of those days at La Jolla Shores, a small beach community that stretches from the sea cliffs of La Jolla Cove to Black’s Beach.
La Jolla Shores is considered one of the best spots for beginner surfers, with very reliable waves. It was the perfect spot for the surf competition we found, which was filled with children and teenagers. It was interesting to watch the competition. It wasn’t much like the professional surf circuit – the kids sure fall down a lot. They would get up, ride for a little bit, and they would fall down. Then they’d paddle back out, get up, and try again.
It reminded me of how, sometimes, when we as adults experience something negative, we don’t tend to forget it very easily. We often will keep the “bad thing” in our mind. Many people maintain a fear borne out of the Great Recession. It was pretty recent, and that movie reel continues to play over and over in their subconscious. It’s hard to forget the fact that your investments lost 50% of their value. It’s something that remains in the forefront of many investors’ minds.
Yet, to be successful in investing – or anything, for that matter – a couple of things have to happen.
First, you have to remember that the wipeout is inevitable. It doesn’t matter how great of a surfer you are. It doesn’t matter how well you are positioned. It doesn’t matter how logical your investment thesis is. There will be periods of time – sometimes months, where for whatever reason, the waves don’t break the right way. The sets don’t come in the way you need them to. You’ll catch a wave that peters out, has no strength behind it, and you will wipeout.
Second, it’s important in times like these, when we’re spitting sand and salt, to avoid the natural tendency to extrapolate a single experience into a pattern. Don’t give one wipeout years and years and years of scrutiny. Hindsight is 20/20, but as every single fund compliance statement decrees: Past performance is not indicative of future results. Using a colossal wipeout like the Great Recession as a major influence on how you invest and make decisions is a way to guarantee poor results.
Over the last 8 years, since the Great Recession, funds have been flowing steadily out of equity investments. People have stopped participating. ETFs have been the recipients of a lot of those funds, as there has been a distinctive turn from active management to passive.
It’s reminiscent of those days in the late ‘90s when you could use a newspaper as a dart board, invest in the companies that the darts hit, and it was pretty much guaranteed to go up. That’s how easy it was. At that point, people started saying, “I don’t need active management. I can do it myself – day trade, pick my own stocks.”
Then, in 2001 and 2002, people had their hats handed to them. They lost fortunes, and quickly learned that the waves do humble you. They picked up their surfboards, and they went home. They missed out on the rebound.
Evidently, this has happened again. People have been afraid to paddle back out since 2008. They’ve had a wipeout. They’re tired – tired of the stress, the rollercoaster nature of investing. This is how cognitive errors are made, and how people make mistakes.
In investing, and in all arenas of life, success and perseverance are intertwined. Keep paddling out, keep getting back on that board. You’ll get a little better at it each time you stand up. Your feet will grip, your balance will improve. You will become more adept at reading the sets as they come in.
It’s the people who take their surfboard home who lose.
Years ago, I was on a family trip to Hawaii, and there was a huge hurricane bearing down on the islands. The day it was predicted to hit was the day we were scheduled to fly out. It left us in a state of uncertainty (sound familiar?). We didn’t know whether we should check out of our accommodations, or if we should extend our stay a day or two… were the planes going to be grounded? Would we be able to make it home?
On that day, we had driven around to a few places, hitting all the public beaches in the Big Island, looking for a last few hours in paradise. Every single beach was closed. Some guy in Honolulu – several islands away – had made the decision to close every beach, on every island. But if you went out to the beach that day, it was sunny, and the water was calm. It was a head scratcher.
There was all this worry that the hurricane was going to hit, and that worry was permitted to affect every traveler in a community that was supported by tourism. The beach closures not only stopped enjoyment by tourists, but also ended the opportunity for business owners to earn their living. It was a wide-reaching decision.
The place we stayed in had a little cove that wasn’t public and therefore not affected by the closures. We spent a few hours snorkeling, swimming, and really enjoying our last day in Hawaii. We had a great time, and never at any time were there any signs of the hurricane or other inclement weather throughout the whole day.
The decision that was made remotely by someone who didn’t even see the weather at the beaches of the Big Island that day affected thousands of people. From local entrepreneurs, staff, and residents to the tourists that support their businesses, most people had their day come to a full stop.
The hurricane never hit the islands. It bypassed them entirely, hitting several miles away, affecting empty waters in the Pacific Ocean. We checked out on time, caught our flight, and made it home safely.
Fear can be debilitating. Yes, you may have wiped out in the past. That guy over there, who may very well be an expert, he sees a big storm on the horizon. If you paddle in and park your board at home, what will you miss out on?
To win over the long term, yes you’re going to have to be right more often than you are wrong. But only marginally so, as long as you stick with it long enough. Recognize that you’re not going to make every right decision. There is no perfect system out there. What you really want to avoid is those catastrophic wipeouts and those Great Whites hiding in the water. You can get through little waves that take you off your board, you can climb right back on again.
– Greg Stewart, CIO