Newsletter – September / October 2009 – Wasting Away…

Wasting Away…

The financial industry normally reserves the word “crash” for a one-day occurrence. But, according to internet encyclopedia Wikipedia, the 1929 crash actually occurred over 2 days. On October 27, 1929, the Dow Jones Industrial Index [DJII] closed at 298.66. It dropped 12.8% on October 28 and another 11.73% on October 29 to close at 230.07, for a total decline of 24.5% in two days. Years later, on October 19, 1987, the DJII dropped 22.6% in one day!

What defines a stock market crash? Consider autumn 2008. From early September to late November, the DJII dropped 35%! Shell – shocked investors were reluctant to open their month-end brokerage statements. Their retirement plans were in tatters. Although it had not been as dramatic as history’s one or two-day market crashes, the autumn 2008 drop had slashed a huge chunk out of people’s savings.

But, here in autumn 2009, only one short year later, the investment community has run up the bullish flag again. Have they forgotten already? Today’s investors have regained the hope that they’ll somehow make last year’s 35% back by simply holding onto the same investments that dropped so sharply last year.

In my book, Beyond the Bull, I discuss human nature and investing: we are creatures who naturally seek pleasure and avoid pain. Sometimes we avoid pain by simply forgetting. We forget the pain we felt last December when we didn’t want to open our month-end investment statements. We just forget, and the pain goes away.

It reminds me of Jimmy Buffet’s song: “Wasting away again in Margarita-ville,” where the jilted lover drinks tequila to forget.

Forgetting is not the solution: we have to learn from our mistakes. The 1929 crash led to the reform of securities law in the United States. The 1987 crash led to the introduction of ‘circuit breakers’ in the stock markets so as to prevent a re-occurrence of a one-day crash. Investors and authorities learned from those crashes. But today’s persistent “buy-and-hold” investors and their stubborn advisors appear to have not learned. The sharp stock market rally since March 2009 has lulled them into forgetfulness.