Thoughts On Money [TOM]

Have you ever played musical chairs? An exciting game, full of anxiety and anticipation, as you are left wondering if you will be left without a seat in the end.

When the music stops, that is when the exclamation mark is written, that is when the calamity begins.

Just to provide clarity, I’d like to answer two questions for our readers (1) Do I believe there are pockets of “bubblicious” investments in the markets today? Yes. (2) Do I believe that there are investments at attractive bargain prices today? Yes. We have a very valuation polarizing market and all the more reason to be selective and diligent about what you own.

So, is it possible to know when some of these bubbles will burst and when the music will stop? I believe Sir John Templeton provides some great insight on these matters,

“Bull markets are born on PESSIMISM, grow on SKEPTICISM, mature on OPTIMISM and die on EUPHORIA.”

The aroma of euphoria is strong, my friends. Proceed with caution.

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Trevor is joined by TBG co-workers Sean Latimer and Leslie Rea to talk about developing the right kind of financial portfolio.

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Trevor has a conversation with TBG Managing Director, Solutions and Analytics regarding investing principles and how to take the fear out of the process.

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If you worked at The Bahnsen Group, you’d know that Sean Latimer and I eat lunch together just about every day. We are blessed at The Bahnsen Group to have a very tight-knit, family-like culture. Sharing lunch together is a time to bounce ideas off one another, share best practices, and problem solve. I learn a lot from these lunchtime conversations, and I am a better advisor for it.

This week, during one of these lunchtime discussions, Sean shared an idea for a topic that he suggested we discuss here on Thoughts On Money [TOM], and today, we will do just that. Sean premised his topic recommendation with a story…

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Let’s imagine we had a time machine, but this time machine would only allow us to go back 90 days – that’s it. So, we jump in our time machine, pull the green lever, push the special purple button, and zoom off we go. We open the door and find ourselves back in the first week of September.

What’s grabbing headlines? What’s filling our social media feed? What’s the conversation du jour at the coffee shops? Politics. The country will spend the next 60 days wondering how this 2020 election would play out and how the balance of power might shift one way or the other. Anxiety was high, and uncertainty was rampant.

Now, let’s imagine we went around polling folks to ask what they expected a November stock market to look like? This was that exact November that was sparking so much angst – it was THE election month. I am sure you would agree that most of our conversations would revolve around a pessimistic outlook for markets in November. This was the consensus opinion leading up to November.

Luckily, we are from the future, so we know what did happen, “It was the best November for the Dow since 1928 and the best November for the S&P since 1950. It was the best month, period, for the Dow since January 1987.” (David Bahnsen, The DC Today). Quite polarizing when we begin to compare the expectations and the actual outcome.

Was anyone optimistic about November? Sure, but those voices belonged to the minority and were probably drowned out by the somber majority. What do we call this minority that refuses to follow the herd? We call them contrarians.

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Trevor Cummings and Sean Latimer from The Bahnsen Group

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What happens if you don’t have principles or an investment philosophy? Then you are going to lean on what “feels” right at the time. These feelings, or what you might label intuition, are often influenced by the current environment you find yourself in. So, in a year like 2017, when you see bitcoin climb from $1,000 to nearly $20,000, you might find that your investment interest has peaked. On the other hand, in a year like 2018, when you see that $20,000 mark plummet back to the $3,000 range, then you would likely be a bit more disenchanted. An investor without principles is like an unanchored balloon; it will go wherever the wind takes it, for better or for worse.

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Stubborn as a mule. That’s how the saying goes, and I’m often that mule. Stubbornness at times can be a strength when it’s a result of deeply held convictions. More often than not though, stubbornness is a weakness. People find themselves falling in love with a conclusion and over time they forget to go back and review the supporting evidence for that conclusion. The longer a position is held the more cemented our stance becomes.

Lately, I’ve found myself explaining financial planning to clients this way – for each financial decision you have to make you need to put all the potential options on the table and weigh them against one another.

Each option has its own costs and benefits, and there are trade-offs based on which option you choose. I try to emphasize that ALL options need to be at least reviewed and considered. Life is full of taboo topics and subjects that you know are common hot buttons in conversation. In finance, these topics might be things like debt or insurance, or cryptocurrency. To combat stubbornness, even our “hot button” options need to be discussed when relevant to a particular financial decision you are wrestling with.

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In the world of Psychology, there is an often-cited study that was conducted at Stanford University called the Marshmallow Experiment. This was research targeting the study of delayed gratification. The research consisted of multiple test variations, but the process across the board was similar. The test subjects, children, were offered the option of one marshmallow now or two marshmallows later, if they were willing to wait. Again, the study was intended to measure the children’s self-control. The researchers would then follow up a decade or so later to see if the test subject’s ability to delay gratification resulted in a measurable difference in SAT scores, etc. Would the child who was willing to delay gratification be predestined to more success based on their ability to resist eating that first marshmallow?

These researchers came to their own conclusions on this relationship between one’s marshmallow decision and how that relates to one’s future successes in life. And like most research, this study has also received its fair share of criticism too. Here’s my question, could one opt for eating the first marshmallow now for reasons unrelated to self-control or patience? What if I wasn’t interested in two marshmallows, and eating one now was more appealing for me personally. Could this decision be deeper than just a binary conclusion separating participants into categories of patient and impatient?

This seems silly to dialogue about when we are talking marshmallows, but there are many examples in life where we are offered incentives to delay engagement. For these 6-year-old test subjects, it was about marshmallows, but for 62-year-olds, this decision is about claiming social security.

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