Fearing things could get even worse, he locked in his losses by selling a lot of his holdings. As it turned out, he sold at pretty much the point of maximum pessimism, and soon after things began to recover.
I was reminded of the story this week while reading two books by Tom Bradley, who co-founded Vancouver-based Steadyhand Investment Funds. Bradley has written in the financial press for many years and also blogs on his web site.
It’s Not Rocket Science and the sequel It’s Still Not Rocket Science are quick reads and available for free from the Steadyhand web site. They can be downloaded, or you can request hard copies in the mail.
The books compile Bradley’s articles going back about a decade, and were sent my way following a column about Market Masters , a book based on interviews with some of Canada’s most successful money managers. I liked the book because Market Masters looked at the way these experts think and offered an explanation of the principles guiding their strategies.
Both of Bradley’s books are full of the same sort of commentary, what he calls plain-English advice about investing. You won’t find stock picks, but rather the things that precede them — understanding risk, having a plan, discipline, the importance of patience and diversification.
One of the articles was written in May 2010, not long after my friend’s father had bailed out. The topic was what you should do when markets crash, when you’re petrified, have no idea what’s going on but have an overwhelming urge to do something. Bradley’s first experience with that was in 1987. The scale of that collapse hadn’t been seen since the 1930s, and he was like a deer caught in headlights — unable to move.
As that drama played out (markets quickly recovered), he learned that when a financial crisis lands on the front page, there’s a lot of information but not much enlightenment.
The quality of information in that immediate moment is poor because the event, by definition, is a bolt from the blue. Nobody has an ability to make sense of it. Experts are winging it just like the rest of us, he noted.
The worst day of this past winter might have been Jan. 19, when the dollar hit 68.69 cents (U.S.). Commodities, the market and our sense of wellbeing had been dropping steadily for about six months. Many were afraid there was a recession around the corner.
Your response at these times, Bradley says, should be to do nothing at all. When emotions are high and everyone is guessing, sit tight. Big shifts in strategy at times of crisis lead to bad decisions, he says. People like my friend’s father, who sell at the bottom, needlessly destroy their savings.
Even so, crises are a good time to take stock. These events are an opportunity to see whether your plan needs changing. But any changes should be gradual, Bradley says, since market extremes aren’t the time for radical steps. Better to move slowly and get it right than react all at once and get it wrong.
Elsewhere in the first book, Bradley quotes the New York-based economist Peter Bernstein, who said that “in calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, they become remarkably bold in their predictions.”
More columns by Adam Mayers