(You Don’t Have to) Walk on the Wild Side
Avoiding risk is sometimes the right decision
I learned one of the most important, but oftentimes least valued, rules for an investor very early in my career on Wall Street, as an associate at Morgan Stanley in the late 80s. It was a different time: The firm was much smaller, and the leadership still considered it to be theirs, despite having recently gone public. The capital we raised at the IPO was traded on the stock exchange, but culturally we were still a partnership, and with good reason: The former partners were now the largest shareholders.
That culture meant every employee was expected to behave as a fiduciary, not just an employee, as if we, too, were partners. So at the end of our training, as a freshly minted crop of young professionals wearing their best suits, we sat down for lunch with the firm’s senior executives, which included the esteemed Richard Fisher, who was then president and soon to be chairman of the firm. Dick shared his perspective, his guidance and his wisdom, including this:
“The most important deal of your career is the one you don’t do.”
Dick was a banker, and he was referring to the firm’s reputation and responsibility as an advisor to our banking clients, but the lesson was highly relevant to those of us in the capital markets division, and it continues to be.
Since then, we’ve gone through more turmoil than one could have imagined: the Asian currency crisis in 1997, the Russian debt crisis in 1998, the bursting of the dot.com bubble in 1999, the great financial crisis and unraveling of the housing market in 2008, and the Covid recession in 2020, as well as countless forgotten periods of volatility in between. There has been opportunity in the aftermath of each of these inflection points, but in almost every case, seizing the opportunity meant having to first—do nothing.
During each of those episodes, there were moments where some things looked compelling, but pausing was the best plan. Which is challenging and not always instinctual for investors who are used to making decisions. When the market is in turmoil, it sometimes calls us, like Holly from Miami, F-L-A in the iconic Lou Reed song “Walk on the wild Side”.
But that’s usually not the best action - more often we should pause for clarity. So, knowing how important it is, how do you know when, in moments of crisis, it’s the right call to just . . . stand by?
I always respect three fundamental rules.
Don’t ride the highs or the lows—the situation is never as good or bad as your emotions lead you to believe. Put more succinctly: Calm down.
The best way to stay calm is by looking at the facts, facts that you yourself have identified as relevant. Remember, though, that spending too much time on the facts can lead to paralysis.
Make sure you’re observing and assessing the facts with the perspective of a coherent framework, one that’s grounded in long, not short-term outcomes.
That said, number three is definitely the most important of these rules. A framework provides consistency of thought, which leads to rational (though admittedly not always correct) decision making. A consistent framework at least gives you a shot at seeing through the noise. So when you’re putting yours together, consider the following:
Take the long view: The economy is durable.
During a crisis, we typically hear from the pundits that the economy is sliding, tanking, cratering. We see local businesses failing. Careers are ruined and retirements are delayed. On a personal level, I do not make light of those realities, nor the pain they cause for people and communities. But from an investor’s standpoint, remembering that roughly 330 million Americans shop, work, and play every day is paramount. When we are forced to change our behavior, as we do during a recession, that change elicits an emotional response, and the noisiest market observers often focus on what stirs emotions: outliers, extremes, and anecdotes. Sometimes they are right, but more likely is that they’re looking to write a story for the morning edition.
Assessing what has not changed, and what will keep going, are far more important than being right.
Uncertainty is not great for consumers or capital spending plans, but even in the midst of uncertainty, consumers and businesses are still spending. They may be spending less, but they are nonetheless buying things. So you have to ask yourself not only what’s changed, but what has not changed. Despite what the press says—and the press does have a way of making us feel worse about economic volatility than we already do—the economy isn’t blowing up. After living through multiple, terrifying recessions and market downturns, I can promise you this: The economy may be slowing, and, as it does sometimes, it may contract, but no matter what, we will keep moving.
That doesn’t mean you should stick your head in the sand and wait; you should just be realistic about the extent of the change you expect.
Which brings me to my next point:
The market is just a bunch of people trying to figure out the market.
I’m definitely not the first person to say this, but in moments of crisis, it bears repeating. People want certainty when faced with a changing landscape, which leads many traders and market observers to describe a definitive narrative that explains the recent past. Understanding how we got “here” is important, but the more helpful action is to seek a careful assessment of the potential, eventual outcome ahead. Acting on a narrative based on the events of today, rather than considering a longer term outcome, leads to a lot of volatility. Not to mention poor judgement.
Whether you have a long time-horizon or a shorter one, you need to take a step back, even if it’s difficult, and ask, “What do I really know, and what has actually changed?” Oftentimes the only thing that has changed is the price on the market, which can be an opportunity. Just don’t forget that the current price is determined by the opinion of the last person making a trade. So remember:
What’s happening to the price of a stock is not necessarily anything more than the next person reacting to the last price of the stock.
Be aware of your limitations; guardrails are critical for an investor.
Everyone wants to have a view on the economy because we all live in it, but to really have a shot as a successful investor, you have to be honest with yourself about how much you know, and how much time you’re willing to spend thinking about what you know. The best investors I’ve worked with have a very broad view of the world and a very narrow set of possible investments. Investors spend all day every day thinking about the information we have, the implications of changes in that information, and what to do with that new information. With that never-ending effort, in a good year, experienced investors are usually right a little more than half the time.
Sit on that idea for a minute.
Then ask yourself, “Is my chance of being right improved by looking at more opportunities, or looking more carefully at fewer opportunities?”
Accuracy and precision are different.
Research analysts dominate the discussion in the markets, and we analysts do like to measure things. That’s important. But spending too much time measuring something—creating what you believe to be a precise estimate—is pointless if your assumptions are wrong. Accuracy, by which I mean the right order of magnitude, is the goal. Instead of asking “how far,” you should first be asking, “Which direction and why?” When you understand what’s driving something down or what’s driving something up, then you understand what’s going to drive it further down or back up.
The instinct is to look for numbers, when reasons are what actually help. Assumptions without numbers are just opinions, but the reverse is even more dangerous. Numbers that don’t lead to or rigorously support reasons result in false confidence.
Which leads to the final point:
Being interesting is more important than being right.
One of my most important mentors, the chief economist at Morgan Stanley, Steve Roach, once advised me that, given the choice between being interesting and being right, go with being interesting. Steve had and still has one of the sharpest minds in finance, and make no mistake, he knew that being right on the markets is ultimately what matters.
Steve is at the Jackson Institute at Yale now, where he is still exceptionally interesting. In the markets, he always wanted to be interesting for our clients because that leads you to the driving issues, and identifying those will lead you to the correct decision. The investors who are myopically trying to figure out what will happen tomorrow rarely do. The investors who understand the likely path toward an eventual expected outcome have the best chance of making the right decisions along the way.
If what you’re looking for is, in the words of Lou Reed, “a hustle here and hustle there,” you’ll probably find some action during every crisis. But more likely than not, you’ll take your assets on a regrettably wild ride, giving away your gains and wishing you had stayed put for a while. The wild side might seem fun (or lucrative) from a distance, but once you’re on it, you may regret it.
