Van has often said we don’t trade the markets or a stock or commodity, we trade our beliefs. Our beliefs are driven by memories of past events and the positive or negative feelings that we attach to those events.
My Grandpa Barton was a great example of past events affecting our beliefs, which in turn drive our current actions. Grandpa grew up in rural areas in West Virginia and the southwest part of Virginia. The son of a carpenter and cabinet maker, his public education ended after eighth grade—there was no high school and the only option was a paid boarding academy. So he went to work and eventually put himself through barber’s college. He then returned to his childhood home to open a barber shop that turned out to be a lucrative endeavor.
Grandpa was an excellent business man and the barber shop sustained him, his lovely bride and two boys through the Great Depression years. Even in the worst of times, people still need haircuts.
He was a shrewd saver and just before the Second World War, my grandpa figured that folks in the US who were just coming out of the difficult depression years would start consuming again. So he opened a general store, known back then as a “Five and Dime.” After they lived and worked through rationing programs imposed as part of the war effort, business did indeed boom after the war. Grandpa and Grandma put two boys through college, became real estate investors, and helped start a local life insurance company.
He eventually sold the Five and Dime to his protege. The store was still in operation until just a few years ago when a Wal-mart opened up five miles away at which point another “mom and pop shop” went the way of the creative destruction business cycle.
By the time I was a young man making my way in world, Grandpa and Grandma had retired and were living in Florida for the winters. I’ll never forget him asking me to look over his investments during the post-Reagan boom years. He held everything in some form of guaranteed investment: US treasuries, FDIC insured accounts, etc.
When I asked if he had ever considered participating in the stock market with a portion of his money, he told me that he saw so many friends and colleagues lose everything they had in the depression years that he would never put money in a non-guaranteed account again.
After all of his successes, my grandpa’s actions were still driven by events that happened 55 – 60 years before.
Today’s market participants are acting in much the same way. The real estate bubble and subsequent credit debacle of 2007 – 2009 are still weighing heavily on investors’ minds.
The Toughest Game
People are acting skittish with their investing capital as every piece of news brings quick market swings. This is not all that surprising given the following:
Not so long ago, investors lived through a 50%+ pullback in the equities market.
Fixed-income positions earn almost zero returns in a yield-starved environment.
The current fundamentals look very negative with major risk factors that include an unstable European Monetary Union and a US debt ceiling political ping pong ball.
Because many fear a big drop in the stock market, they still see it as a dangerous place and retreat at the first signs of any pullback.
So investment money is running “hot” right now—moving in and out of markets with a quickening pace at every small turn. Every move up in equities, commodities, etc. has been subsequently met with an equally big pullback.
Having patience in these choppy markets where returns are hard to find is the toughest game that investors play.
My grandpa’s highly conservative style, using only guaranteed instruments, would serve him well preserving capital in this environment. But over longer periods of time, my grandfather’s approach only guarantees that inflation will eat away at low-earning piles of money.
Now that we’ve looked at the anecdotal case of my grandpa, next week we’ll revisit some research into this area of past experiences driving current actions. Until then…
Great Trading, D. R.