Episode 1You Make Most of Your Money in a Bear Market – You Just Don’t Realize it at the Time
|Well, Morgan, we've talked a lot about market volatility and market downdrafts being the price of admissions. I want to take that to a different level and talk about a phrase of my grandfather's, which was "You make most of your money in a bear market, you just don't realize it at the time". In many ways, he was very lucky because of the timing of his investment career. He got into the market at a time when the market was right in front, coming out of a long protracted bear market of the '30s.
|Then, he actually left the investment business in 1968. He took a role at the State Department for seven years. He returned in 1975, and the market in tatters and ruins. He came back unscarred by what people had gone through in that seven-year period, which was the idea of seven years of bear market, the market going nowhere. Every decision... The paper indicates that you were wrong on that decision.
|He had this sense that in a bear market you can create so much value. You're just not going to feel like you're doing the right thing. As we've gone into a period of real fear and pessimism growing out there, I'm curious how you think not of reducing volatility to a cost that you want to inure yourself or insulate yourself from but instead to an opportunity, to the idea of what does it take for somebody to lean into a bear market, to recognize that they're getting more value for each dollar invested, that lower prices increase future returns.
|Most people would obviously recognize the value of something that they want going on sale, whether it's food or clothes, or whatnot. They would also realize the value of going into a career that had less competition than something else. If you go into a career where it's just cutthroat competitive, law or investment banking or trading, whatever it might be, you realize that even if you are a genius and even if you know the right answer, you might still fail. Or, even if you're successful, it's going to be a very marginal success relative to the rest of your peers. But if you go into a career that is just run by a bunch of bumbling idiots, you can run circles around them.
|I think it's not just the valuation arguments, which can be over the heads of a lot of individual investors if you're speaking to them as a financial advisor. But I think, if you were to frame it as going into an industry that has less competition, that's what a bear market is. It's the famous Buffett quote that, during a bear market, stocks return to their rightful owners. I think that's what it is too. What gets washed out during a bear market tends to be not necessarily the less wise investor. It tends to be the investors that have shorter time horizons who are playing a different game than you are. There are some traders who tend to get washed out, where the game that they were playing was a momentum bet that stocks were going to keep going up.
|By and large, during the bull market, they're right; that stocks will keep going up. When that game ends, it's not necessarily that they got pushed out or they failed. It's just that their game was over. They hit the fourth quarter, and it's done. They're the ones who get washed out. I think, also, just realizing that just because a lot of other investors are leaving doesn't mean that your game has lost any relevance, that this is actually the prime time for your own game. I think that's a lot of it as well.
|You will see, as an advisor, too, who belongs to the 10% club of people who don't need any help with their investment. They just understand it intuitively. I found that a lot of investors... You don't need to sit down and really explain, at a deep level, the theories of value investing. You either get it, or you don't. It can be really intuitive to people. Like, "Oh! Of course, this would be an opportunity for me," or, on the other hand, "Oh, the market fell 50%. Of course, you have no idea what you're doing." It tends to be one of those or the other. I think that's okay just embracing that some people have that value mentality and others don't. Creating an investing structure that acknowledges and accepts with both hands who they are and their view of the world is really important.
|It's such a funny disconnect, though, isn't it, Morgan? Because I think people are wired with a value mindset when it comes to other aspects of their life. As you said, they buy when prices are on sale. They check the expiration date if steak is on sale. But they don't just say, "Well, something must be wrong." They figure, "Well, somebody made a mistake somewhere in terms of buying too much inventory. Now, I'm the beneficiary."
|There is something peculiar about the nature of stocks, where people so divorce the ownership of this piece of paper from the recognition that it is an ownership interest in the business, and the returns of the business are going to be whatever they are. Knowing that buying that business at a lower price can only mathematically increase your future return.
|I like Templeton's... A positive way of saying it is that bull markets are born on pessimism. They grow on skepticism. They mature on optimism, and they die in euphoria: this idea that when people are pessimistic, they think we're in a bear market. Instead, they should be thinking, "We are in the birth of a bull market." But boy, to me, it's when advisors really earn the money.
|If you can keep your clients in the game during a bear market, you've earned your fee for the next 20 years.
|To the contrary of that, if you lose a client... maybe not because it's your own fault. But if your client were to bail during a bear market, that's a scar on their finances they will never recover from, will be on them forever. This gets to a different topic. But the value of a financial advisor and do they earn their fee? I think it all comes down to the question, can you keep someone invested when they might otherwise bail during a bear market? That's everything. You, as an advisor, can earn your fee for a generation by keeping them invested in 2009 or April of 2020, whatever it might be when it's so tempting to bail. You keep them in. You're all set.
|Absolutely. Right. Of course, it speaks to the advisor, as a professional, where the view is, you're doing what is right for the client, not necessarily telling the client what they want to hear because what they want to hear is, "Oh, no. We should go to cash and wait until a safer time." It takes a fiduciary mindset. I will say it is also where advisors, in a sense, can make their career...
|...because memories are long. Clients will look back and say, "Boy, I was really scared. You saved me in that time."
|It makes it easier for them to do the right thing in the future because they've built that credibility in the hard time.
Chris & Morgan Bios
Chris is Chairman of Davis Advisors, an independent investment management firm founded in 1969 with approximately $20 billion in AUM. He’s co-portfolio manager of the Davis NY Venture Fund as well as other portfolios focused on Large Cap and Financial companies across mutual funds, SMAs and ETFs. Chris has over three decades of experience in investment management and securities research, was recognized as a Morningstar Manager of the Year and was recently named to the Board of Directors for Berkshire Hathaway.
Morgan is a partner at The Collaborative Fund and serves on the board of directors at Markel Corp. His book The Psychology of Money has sold over two million copies and has been translated into 49 languages. He’s won multiple awards and accolades for his writing and insights from the Society of American Business Editors and Writers, the New York Times, and other industry organizations. Morgan has presented at more than 100 conferences in a dozen countries.