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Individuals, Markets, And Green Shoots Of Hope 052509


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Individuals, Markets, And Green Shoots Of Hope 052509

  1. 1. To Our Clients and Friends, “And today the market seems to be in just the kind of mood that would have worried Mr. (Benjamin) Graham: a jittery optimism, an insecure and almost desperate need to believe that the worst is over. You can't turn off your feelings, of course. But you can, and should, turn them inside out.” Jason Zweig, The Intelligent Investor (WSJ 05/24/09) (Link to article: Last week I received via e-mail a very timely investing article from a good friend. The article is quite interesting and insightful in delving into the manner by which we as human beings and investors make some of the most important and impactful decisions of our lives – those decisions involving money and, in turn, our families’ futures. The article, by Dr. Robert Cialdini, postulates that two principles explain how people abdicate decision-making to others under conditions of uncertainty. These principles are Authority (external validation, rather than self-validation of an idea) and Social Proof (when the approval of respected figures, rather than empirical evidence or logic, dictates decision-making). In other words, if someone I respect endorses the idea; I can comfortably abdicate responsibility for doing my due diligence and just go for it. (Besides, a number of my peers are already doing it!) As a guide for investors who hope not to get duped when the next Ponzi comes around, this article holds more hope than practical value. The reason: we read articles like this one with agreement and then must act (with discipline) through the faculties of our left brain. Yet it is our right brain by which we are most easily swayed to make the leap of trust and succumb to social influence or authoritative endorsers. This includes influential friends and investment advisors. The more positive alternative of asking the tough “why” questions and doing our own objective due diligence is easily ignored. It’s not coincidental that these same behavioral patterns move investors into the market with hopeful anticipation when it has already peaked and out of the market with fear and panic when it is approaching a bottom. Herd mentality, which is the stuff of market self-perception in the short term, becomes its own self perpetuating prophesy. Short term market behavior, regardless of the underlying economic 1
  2. 2. fundamentals, is always simply the sum of many individual human irrationally moving parts. We are now living through a real-time scenario that is illustrative of Dr. Cialdini’s hypothesis. Investors are buoyed by a bear market rally that is supported by positive “green shoots” of economic news. Media commentators and advisors (authority) help us to believe that this is signaling the imminent recovery of the economy. This all very much reminds us of the story of the Emperor and his new clothes. We are constantly reminded that the stock market is, after all, an historic 6 month leading indicator of all real economic recoveries. However, at this stage, the emperor may look good, but it is debatable whether he is actually clothed. Let’s examine the market’s perception from the media versus a few economic data- based facts: • The trillions of dollars pumped into the banking system are loosening up bank lending – finally! (Reality: the money isn’t being lent fast enough to make a difference. It’s still trapped in the financial sector, where it cannot meaningfully impact the business of doing business as it was intended.) • There are definitely “green shoots” of recovery out there. (Reality: True, however the International Monetary Fund (IMF) calculates that the actual U.S. and European bank losses related to this credit debacle may mean that another $1.5 trillion in losses is yet to hit the balance sheets of banks.) • The current rally began on great news that Quarter 1 U.S. bank earnings were surprisingly good. (Reality: the environment created for them by the government was equivalent to reducing the cost of goods to zero for one of our car manufacturers; and then buying a couple of million cars from them – courtesy of the U.S. tax payer. The earnings reports that triggered this rally were due to taxpayer largesse and accounting alchemy; not the result of the economy suddenly and miraculously reviving itself.) • The data cited above is drawn from Neils Jensen’s Absolute Return Letter, May 2009*, via John Mauldin’s Outside the Box newsletter. The “green shoots” of recovery are real, and are indeed a hopeful and positive sign; however that does not mean that the current rally can or will become a real bull market without a lot of underlying healing and purging taking place in the forest of the global economy. “Green shoots” appearing in the wake of the waste of a devastating wildfire do not turn the forest green over night. Nor does the ecosystem (GDP growth drivers and markets) which a healthy forest supports return to normal any time soon. It’s best to try understand the forest conditions beyond beneath the “green shoots” of the first new signs of life we are seeing before deciding to buy and move in to our dream home there. Eric Eric D. Bruck, CFP® Principal 2
  3. 3. Silver Oak Wealth Advisors, LLC 12121 Wilshire Blvd., Suite 1300 Los Angeles, CA 90025 Tel. (310) 207-4800 Cell (310) 890-2610 Fax (310) 943-0398 Reply to: Website: 3