Articles: Sir John Templeton

Talking Sense: A new chapter in our economic history
By Tom Grella Sr.
12/1/2008
Eagle Tribune

Financial woe - and opportunity - loom

"A bull market begins on pessimism, grows on skepticism, matures on optimism, and dies on euphoria."

— Sir John Templeton

It is difficult, if not impossible, to witness the financial tsunami of these past months and not be frightened, frustrated and even angry with Wall Street as we see the value of our homes and our retirement accounts decline.

It will continue to be difficult to get a mortgage because of the credit crunch. Companies are passing out pink slips. Unemployment is up, spending and consumer confidence are down, and the stock market saw four out of five days where the Dow Jones industrial average had swings of 400 points.

Such roller coaster volatility does not help restore public confidence at a time when investors need to be reassured that, as bad as it is, this is not Armageddon.

An article in the September issue of Business Week magazine claims that most financial calamities are not like natural forces beyond our control. They are predictable events that can be prevented with sound rules and stiff enforcement.

Talk about naÃØve. Someone should give that writer a history book! I have a different point of view, one that is best explained and illustrated in the best seller, "The Black Swan" by Nassim Taleb.

He uses the black swan as a metaphor for the unusual and unexpected. People know white swans. They are ordinary, much like our daily existence. Most of us have never seen a black swan, so its rarity leads us to doubt it even exists.

In Taleb's world, history is made not by the predictable and the average, but by the random, unknowable, unpredictable events that can have big consequences. Think Sept. 11, 2001, a human tragedy and event that made every American aware of terrorism and made it personal because it was on our soil.

September 2008 is another black swan. It begins a new chapter in our economic history. And the events of the past few months will change our economic landscape in ways just as unpredictable as the events themselves.

The Chinese have a saying, "May you be condemned to live in a time of transition." This is because big changes come with transition. People are caught off guard, surprised. For some, their lives will never be the same.

When you don't know what the future holds, any decision is tough to make. Investment decisions are really hard because your confidence is shaken when the stock market is in meltdown mode.

The stock market crash of 1987, while triggered by a different set of circumstances, had the same result. A heightened level of fear and anxiety and a sickening feeling in the pit of your stomach comes with every bear market. But do not let all the pessimism make you forget that times like this are exactly when you get the opportunity to invest in great companies at bargain prices.

The question most often asked now will be "How much can I lose if things go bad?" rather than "How much money can I make if this turns out to be a home run?"

Debt will take on new meaning. It will be a bad word, something to be avoided if possible. Excessive leverage will disappear. Everyone will get religion and be more conservative in all their financial transactions.

I am starting to see this in some conversations with our clients already. Now people want to pay off their mortgage and home equity loan instead of using their house as a personal ATM. Maybe our grandparents, who didn't buy something unless they had the money, knew something.

Countries will also be re-evaluating their risk and debt outlook regarding the United States. This is an important fact to consider in deciding what percentage of your portfolio you want invested domestically versus the rest of the world.

So what should you do now?

Often, common sense provides the best answers. For example, even in a black swan world, I still have choice. I can choose to concentrate on what I do know and what I can control.

Let me give you an example. Make a list of the five things in life that are most important to you. I bet money is not in the top five.

Here is my list: Love, Faith, Family, Health, Friends, Reputation, and Personal Fulfillment. My guess is that many of these are also on your list. When thinking about money in context with the rest of life, how much the stock market goes up or down in a month or in a year somehow seems to be less important.

By no means am I trying to imply that money and security are not important. Our retired clients living on a fixed income find times like this particularly difficult.

Eliminate what adds to your fear. During bear markets, it is difficult to ignore newspapers, magazines and television — the headlines are always in our face. But the more we see it, read about, and think about it, the more our fear increases. Before you know it, you put yourself in panic mode and sell everything at the worst possible time.

Find something to do that makes you feel good and gets your mind off the economy. Visit friends. Play golf. For me, it's bocce and my grandchildren.

Another great tool for dealing with fear is the yardstick rule. Imagine that every inch on the yardstick represents 21âÑ2 years of your life. At your age, calculate where you are, and put a thick line with a black magic marker at that point. Now look carefully at the yardstick. How much time have you used up, and how much do you think is left?

Remember, time is one thing that money can't buy. How much of it do you want to spend worrying about the gyrations of the stock market? How much of it do you want to spend doing the things you really love to do?

Diversify your portfolio across a broad range of investments so that when black swans do happen, your psyche is unaffected.

Thomas Grella Sr. is president of Grella Financial Services. Questions or comments can be sent to him at [email protected].

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