Hello, my name is Gary Bowyer. Some of you remember me because I was your financial advisor years ago. Others do not know me because Ben has always been your advisor. I started my advisory business in 1987. Fortunately, the business grew. I added a partner in 2003 and we continued to grow thanks to the trust that our clients placed in us. In 2010 I decided to sell the business to Deerfield Financial Advisors. I had known the partners for over 15 years, the senior partner was a personal friend. Deerfield sent this young recent college graduate to the Park Ridge office (my old firm) for me to mentor, and train to take over for me when I planned to retire in 2015. That young man you know as Ben Hockema. As our time together grew, it became obvious to me that Ben was the right person to replace me because he combined the technical skills and most importantly the interpersonal skills needed to be a successful financial planner.
After I retired, Ben and I have remained good friends, having lunch monthly, attending some baseball games and competing against each other in two fantasy baseball leagues, where I usually finish ahead of him. (Ben here- Gary’s memory is rather faulty on this point).
When Ben decided he wanted to open his own planning firm he asked me to become an investor. I gladly accepted the offer because of my trust and faith in him. He also asked me to work with him, setting asset allocations, monitoring investments and searching for possible new investments as appropriate. As the old saying goes: two heads are better than one. Ben and I are good at kicking ideas around. The discussions and sometimes disagreements are good for us and especially good for you. Which brings me to the purpose of this letter. Periodically, I will be writing my thoughts regarding investments and economic issues. These letters will have no set schedule. You’ll hear from me when I have something important to say. You might get another letter in week or two or none for the next few months.
Now, I want to express my thoughts about the current bear market that we find ourselves in. It’s the fastest drop in as short a time since the end of WWII other than the 20% one day drop in 1987. As I write this, the Dow Jones average is down 28% so far in 2020. There are two major reasons for this bear market. (1) The coronavirus. As you all know it very serious and we don’t know how bad it will get or how long it will last. This naturally induces fear. Fear is the strongest emotion regarding investing, stronger than greed when markets are going up. None of us have ever experienced anything like this lockdown. We are all scared about our own health and that of our family and friends. (2) The national lockdown is causing a major economic slowdown. In fact, we will probably have a recession if we aren’t in one already. Some economists, that I believe are credible, are forecasting a contraction of 10% to 13% in the second quarter. Ouch!! No wonder the market is down! We probably haven’t seen the lows. I have no idea how much lower the market will go. Nobody does. Recessions and bear markets are, however, a natural part of the investing cycle. These two factors explain the reasons for the huge market drop.
Warren Buffett says that when the tide goes out you see who is swimming naked. There are several factors that exacerbate this bear market. Excessive debt is one form of swimming naked. The 2008 financial crisis was primarily caused by excessive debt on homes much of it done by homeowners with poor credit. When they couldn’t pay the financial markets froze and many banks failed. This time, buying stocks and bonds and using derivatives on margin may be the single biggest reason for the magnitude of the drop. Investors using debt to buy investments will get margin calls (brokers forcing sales of investments because the borrowing is too high against the lower value of the investments). As investments drop, causing forced sales which makes markets more volatile than they would be otherwise. Also, institutional investors use hedging techniques that usually work to reduce the risk in their portfolios, (i.e. they buy investments that normally go up when stocks or bonds go down). However, in severe bear markets the negative correlations don’t work as intended as many of the investments used as hedges go down also, Ouch again! I would be willing to bet Ben’s house that one or more large hedge funds goes spectacularly bankrupt before this is over. (Ben here again- Gary’s right but let him bet his house, not mine.)
Jason Zweig, writing in the March 7th edition of the Wall Street Journal says:
Investing, now more than ever, is about controlling the controllable. You can’t control the markets. You can’t control the coronavirus. You can control your own behavior, although that requires making accurate, honest predictions about yourself.
Controlling the controllable doesn’t just mean shrugging off whatever is out of your power. It also means putting some calm and serious thought into what is within your power. Your future success may depend less on what markets do-and more on spending a few quiet minutes figuring out who you are as an investor.
Bottom line, much of what Jason says is about controlling your emotions. Emotions make you want to buy more stocks when the market is shooting up and your neighbor or relative is bragging about the big gains he/she is making (also called FOMO-fear of missing out) or wanting to sell after the market has already dropped a lot. Emotions induce you to make the wrong move at the wrong time. This is where Ben adds a lot of value by helping you keep your emotions in check. As an example, during the dark days of the 2008 market crash, I had a client who became very scared and wanted to cash out of her stocks. Many of her coworkers were selling everything and moving to cash. That’s all they talked about during work breaks. She talked to me about the situation and wanted to sell. I assured her that staying course, continuing to invest monthly in her 401k plan was the right thing to do. She decided to stay the course. In the end, she made out very well as the investments she made in the dark days turned out to be the best investments, buying at the lowest prices. Her coworkers avoided the worst of the drop but missed out on the sharp gains that occurred right after the market bottom.
Ben and I have been talking about rebalancing your portfolios. You will probably see trades over the next days and weeks as Ben rebalances. If the market continues to drop, we’ll probably rebalance again. By doing this you will buy more stocks (engines of future growth) at cheaper prices. (Remember: buy low, sell high.). Of course, don’t hesitate to get in touch with Ben if you want to talk about anything. I hope your found this note helpful. Until next time.