Fear Be Not Proud, Panic Hang Your Head
When Lewis and Clark made contact with the Sioux in the Great Plains, they found amongst the Sioux an apparently unique society. A number of Sioux men had made a compact that no matter how great the danger, they would never turn back. This group was proud and held themselves apart from the other Sioux. But there is a price to be paid for great courage: Out of the thirty that had originally made the compact, only six were still alive at the time the American explorers arrived.
Also, consider the Israeli army, which used to have gender integrated units. But the men were embarrassed to show fear in front of the women, and vice versa. And sometimes, in war, it is best to throw dignity aside and plunge unseemly for the foxhole. Due to the reluctance to engage in this sort of behavior, the casualty rates were higher. So they stopped the practice.
Yes, fear helps one to survive. That is the reason for having an emotion like fear. And in September of 2008, it would have been very good to be afraid, to be very afraid, and to cash out your stock market chips and bail. But in March of 2009, when there was still lots to be afraid of, in many respects more to be afraid of then in September of 2008, it would have been very good to put those fear feelings aside and to act in a courageous manner, buying lots and lots of stock. If you had thrown caution to the wind, maxed out your credit cards, and put it all into Fifth Third Bank (FITB) shares or some other stock beaten down to an extreme low, that would have worked out really, really well. But if you had asked ten people if it was a good idea to do that, all ten of them would have told you not to. So how can you know when to be afraid, and when to be courageous? That really is one of the great riddles of human existence.
Of course, in the short term one cannot know. We all make our investment decisions in, to borrow from famed military analyst Carl von Clausewitz, the "fog of" investing. Data is indefinite, noisy, and subject to revision. One trend runs counter to another. Misinformation is deliberately disseminated. The great unknowables, such as the effect of the huge nominal value of credit default swaps, become more and more frightening as the bear analysts get proven right time and time again and the bulls huddle, chastened, in a quiet corner.
In the fog of investing we are reduced to a reliance on policy. One of my policies is to not panic. Sure, sometimes it would be good to be the first one bolting through the theatre exit. But, in general, it is foolish to succumb to panic, however much one might feel afraid. And I did feel very afraid at times, in midst of the panic. But I'm glad I held on.
It is important to remember that bear markets end when it appears that no end is in sight. Bear markets end when there is little reason for optimism and a lot of reason for pessimism. They end when bear analysts are parading in the full glory of their oft confirmed prescience, illuminated by the spotlight of media adulation. They end when the thought that government action could address economic problems appears to be a laughable exercise in naïveté.
We should also remember that bull markets form when there is extreme skepticism that a recent upswing could be anything more than a brief respite from a continuing plunge. Bull markets form on wobbly knees, appearing fragile, with little in the way of economic growth prospects backing up the positive market movement. At every stage there are a lot of skeptics, loudly calling out, "sucker's rally." How could it be different?? If it were not for the skeptics, the market would already be at a level that would make further progress actually unlikely. The market moves higher as skeptics are convinced and bears turn to bulls. So, when there are a lot of bears ambling about, it is ripe season for conversions.
Yes it is regrettable that my portfolio plunged in October and November of 2008, but I still believe that the better policy is to bet on growth, because that is the more usual pattern. The recent instance of market turmoil does not make it a common occurrence. We should take into account the possibility of a market disaster, but it should not overshadow our actions. We should invest for the more usual case of growth, bearing in mind that disaster is always a possibility.
The best policy is to reject panic. There may be instances in which outcomes would have benefited from panic, but there is no way to distinguish a brief swoon from the beginnings of a market plunge. So if we were to see the exact same pattern as in early September 2008, the eventual outcome could be completely different. Next time, it could prove to be the ideal buying opportunity, just as we can now see that March of 2009 was.
So Fear be not proud and Panic, hang your head. Fear may help us to survive and sometimes even Panic, too. But Courage, at the right moment, can pay off very handsome, and that is something Fear and Panic never do.