Why is investing so difficult? The war in Ukraine, restrictions on the Russian stock market, COVID-19, and so many other unknowns are creating a sense of uncertainty and fear. Is it natural for people to be good investors? It seems to be our natural instinct to run and hide from things that we find frightening or threatening. Join us today as we explore the psychology of investing and how to prosper with clear thinking.
Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management. This is Think Smart with TMFG. Today on Think Smart with TMFG Mike and I are going to be discussing why investing is so difficult. Mike, today is our 150th podcast. Congratulations.
It’s been a great 150 so far, hasn’t it?
It certainly has. This one is a little bit different. We’re actually not even in the same location. I am currently on a road trip down in California. I think you’re at home in Aurora.
The sound quality may not be a hundred percent, but we appreciate everyone listening.
For 5,000 kilometers between us we’re doing okay.
I think so technology’s still working. Mike, your idea was to talk about why investing is so difficult. Obviously, we have the war going on in the Ukraine, we’re two weeks into it. This thing is probably going to go on for quite a while. We’re seeing all kinds of restrictions put on Russia. Their stock market has been closed for over a week. We’ve seen the world stock markets start to drop in Canada. We’ve seen the first increase in interest rates of a quarter percent. COVID is, at least in Ontario is…looks like it’s coming to an end. Where I am in the U.S., there’s still COVID going on because they didn’t have the same restrictions. Why does that get you thinking that investing is so difficult? Would today not be a good time to invest?
Well, I guess if you go back to the idea, “are human beings wired to be good investors”? Is it a natural for us to be a good investor? I was listening to some podcasts over the last couple weeks and they were talking about…they were going back to Darwinism.
The idea that if you go back and go to survival of the fittest, you start off with, when people hear a noise, they generally go and take cover, and that’s instinct and it’s built into us. You know it’s instinct because when a baby hears a noise, before you train them that there’s any danger, a baby’s going to react poorly to that noise too. That’s wired into our DNA. What they talk is the whole Darwin theory is that some people didn’t have it wired in and when they didn’t have it wired in their DNA, they didn’t survive long enough to reproduce so they disappeared. We’ve learned to run from things that produce fear. That’s what’s created this survival type of instinct to people. People like to react and change to anything that happens. We were talking before about things that you have to change that we’ve learned through our life. What are some examples of those things where we should actually react and change?
It’s interesting you say about, “when we hear a loud noise our reaction is to run”. I still remember you and I, and a group of team members had gone down to the Raptors rally after they had won the championship. I remember we were in a huge crowd down near City Park. There was a loud noise and it sounded like a gunshot. Very quickly the crowd starts running and people were getting trampled and people kept running. I was lucky. I was in a position behind a gate and all I had to do was…no one was going to get through this gate. I just had to hold my position and let everyone go by. But the crowd’s natural response was to run and to keep running until they felt they were clear. That holds true with investing. When COVID first hit, we saw people run. We saw the stock market drop dramatically right away. When this war started, the market went down right away. This is our human natural reaction to do that, to run. What are some other examples?
Well, if you look at things that we usually try to change. If your doctor comes up and says, “there’s something going on with your health and you’re not doing well”, right? One choice would be to do nothing. But that doesn’t seem like a good option. Generally speaking, when we find there’s a problem with something like our health and we found something’s gone wrong we’re going to start to either go to the gym. Start to change are exercise regime. We’re probably going to change are diet. We’re going to seek other doctors and dieticians. But when someone tells you something’s wrong with your health, you would never really do nothing, right? Stay the course. I remember you used to always tell us that on your business exam, you always got one point…”do nothing” was always an option that was worth some points. It always seemed like a funny one. But it’s true “do nothing” is always an option. But with anything like your health “do nothing” is a pretty poor option to choose, right?
Absolutely. You get a bad diagnosis from your doctor. Your overweight or high blood pressure or whatever it is, you’re going to take an immediate change. You’re going to be in that gym the next morning. You’re probably going to be having a protein shape for breakfast. You’re going to be having a salad for lunch immediately. You’re going to react to it. That’s just how we are wired.
Even from a young age, when you’re in school, you go to school and you’re failing out on a course. You’re not doing well. Would your parents ever say “no, just do the same thing you’re doing”. If something’s gone wrong in school, the first thing you’re going to do is you’re going to have to try and change your study habits. You’re going to start to read more material or different material than you’re doing before. You’re going to need to get a tutor. You would never say, “I’m failing out, so my solution is I’m just going to do nothing”. It’s not a good option. We’ve been taught this from grade five, don’t do nothing. Another thing you used to always say to staff. I always thought this was a great line. “You’d rather be fired for doing something, than fired for doing nothing”. I always thought that was a great thing for a staff to take up. Always try to do something don’t get fired for not doing anything.
Yeah. That was from an old boss at Hudson’s Bay company, Joe. He always said, “don’t sit in your office, go out and do something”. “If you’re going to get fired, would you rather get fired for doing something or fired for doing nothing”? It was valuable advice. Having had three kids and just seeing what they’ve gone through, the minute we see a bad report card, or we used to anyways, our first reaction was “things have to change”, right? Okay. You’re going to have to start the minute dinner’s over. The minute you get home from school, you have to hit the books. If that didn’t work after a couple months, we would look at “okay, how can we get extra help at school, or maybe we need to go outside of school and get a tutor”. But we were taking action right away.
Yeah. We both watch sports all the time. The biggest changes…the reason why you have between periods is so you can get your team straightened out from what they were doing wrong the last period. That great halftime football speech from that one movie, what was it? Which one was it?
With Al Pacino. Yes.
Al Pacino. It’s the greatest speech ever in a movie. It’s about halftime on how they have to change around everything they were doing in the first half. Everything we’ve done in our life from playing sports…is if something isn’t working right, and something goes wrong, you have to make an immediate change.
Well, let’s turn that around and look at investing. We often believe the absolute best thing to do when something like this happens, when COVID hits, when a market correction happens, when a war starts is to do nothing. It doesn’t mean we’re doing nothing completely. We may be rebalancing the portfolio. If one of those asset classes drops below where it’s supposed to be. There is something we’re doing. But for the most part, we’re telling them if they were 60% in stocks or 70% in stocks to hold that amount in stocks, regardless of what happens in the world.
Even the re balance’s actually run in toward danger rather than away from it. During a volatile time you have to move toward the risky asset. We’re just not used to that.
We’re not wired for it. So you’re telling me, that asset class is now down 20%, and you want me to put more money into it. If you look at the strategy behind that…and here’s what I think investors struggle with. Is if the market drops, future returns are going to be higher. If the market goes up, future returns are going to be lower. But as you and I know after doing this for over 30 years, clients love to give us new money when things are going well. What that really means is that their future returns will be lower.
It’s a very tough concept for people to get. It feels like it should be different. But the lower the price, the higher the expected future cash flows, based on the price you’re paying. Which means a higher expected future return. It’s investing 101, but it’s the hardest concept to get through to people.
Here’s a simple example that we’ve gone through recently. You and I were just looking at some numbers before the podcast. The U.S. Market, depending on how you look at it is down over 10%. The Canadian market is up somewhere between five and 10%. That hasn’t been the case for the last 10 years. The U.S. Market has dramatically outperformed the market by three to 4% a year for the last 10 years. But we kept telling our clients to keep putting money into Canadian equities because it would come back and it would rebound, and sure enough it has.
Two years ago, once this pandemic hit oil futures hit zero. They were actually went negative. We see where oil is going. It’s hard to believe that under two years ago, people weren’t even willing to pay zero for oil because it wasn’t worth storing. It’d be hard to come up with a story behind this because we know electric cars are the future. We know all that, right? It’s not even a “what if” game anymore. 10 years from now, most of us are going to be driving electric cars. That’s just how the world’s going. It’s funny, you talk to people that are in the industry and they say, they’re just not putting any more development money into gasoline engines. When you see this happening, you realize that oil is going to be a limited time. But you never realize that it could go up this much this quickly, you just don’t know.
Completely unpredictable. Which is why we say “do nothing”. Because if you do something, you’re actually thinking you know what’s going to unfold. Very simply, you could have the Ukraine and Russia come to an agreement tomorrow and fighting could stop. No one knows that. Not even Putin knows that at this stage. I’m not saying that’s going to happen. I’m not trying to make a prediction here, but something like that will happen at some point.
Yeah. Everyone wants to grab the controls when things start to get rough. But a lot of times they don’t know what to do with the controls.
You made the comment that people may consider getting a little bit more aggressive when markets are bad and possibly getting more conservative, when markets are good. What would that look like?
Well, you see someone in these rough markets going to change their position. If they were in, let’s say a 60, 40 portfolio, 60% equities, 40% fixed income. And the markets took a pretty big hit. They may say, “Hey, now’s a time where I could take on a bit more risk. I’ll move to a 70, 30, 70% equity port, 30% fixed income portfolio” and do it at a time when the markets are down. Because you’re not as much risk by doing that on a down market, then you are in an upmarket. When it feels good and just came off a 20% a year. It is a risky move and adding more equities to your portfolio. When equities have just taken a large hit, it’s a lot less risky of a move.
With all the technology in the world, with all the information out there, you would think that investing would become easier. Do you think investing has become any easier in the time that you and I have been financial advisors?
No…it can be. There are easier solutions out there. We’ve seen them before. They have much better balanced portfolios than they did 20 years ago. It’s just much simpler to run and a lot cheaper to run. That’s come a long way. But along with that, they keep on coming with more complicated investment options. All these facts that are out there, cryptos and all these different things, that are really distractions. I got to say that the financial field has come up with simpler solutions, cheaper solutions and better solutions. But along with that, they’ve also created this whole broad span of complicated areas that people want to experiment in. That keeps them very distracted from the good solutions that are now out there.
Definitely. Our take is investing is very difficult. It’s probably not mentally going to get any easier at any point. We’re in a rough period right now. No one knows how it’s going to end, but it will end and we will move forward and the markets will go back up. Any additional thoughts, Mike?
It was funny. I was looking through my notes and I put one thing that says “I like the woods, I like to camp”. I always heard that idea that, “if a bear attacks you’re supposed to play dead”. It seems like a great idea. But I always thought from when I was like five years old on a camping trip, I don’t know how I would play dead if a bear came and attacked me. It’d be hard to just sit there.
We think investing is tough. I think that would be the toughest thing. If the bear’s coming down on you all 600 pounds of them.
Yep. Sometimes investing is just like the bear when it starts to attack, when that bear market comes at you and begins to attack, just play dead and do nothing.
And if it doesn’t work out, it won’t matter anyway.
That brings us to the end of another week. This is Rob and Mike with “Think Smart with TMFG” thanks and have a great week.
Assante Capital Management (15:42):
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