Getting started in finance and investing is hard if you never took a class on either topic in your life. That’s where I sat in the summer of 2007—fresh off a degree in philosophy and starting as an intern at O’Shaughnessy Asset Management. Full disclosure here: my start in the business was as classic a case of nepotism as you will ever find. My father was in the process of leaving Bear Stearns Asset Management and setting up O’Shaughnessy Asset Management, and offered me an internship. It was somewhat open-ended. It was unpaid. I never would have had that chance had it not been for the family connection. People bust their butts to get a first chance in the asset management business—I was just incredibly fortunate. In many ways I was like a member of Warren Buffett’s “lucky sperm club” who then went on to win the lottery.
Like most philosophy majors, I had no idea what I wanted to do, but I knew it would be downright foolish to miss the chance to help set up a new company at the ground level. This involved looking for office space, collating, and calling clients to walk them through the logistics of transferring their accounts.
This wasn’t exactly scintillating stuff, so I spent my spare time learning. Reading is my first love, so I read as many books as I could on investing strategy and investor psychology. I remember being floored by David Dreman’s Contrarian Investment Strategies. I realized that I wanted to understand markets, and I wanted to go into the research side of the business—so that is what I did.
This all seemed great between July 2007 and the summer of 2008. I was learning fast and enjoying myself. Sure the market appeared to be in a bad lull—off of the November 2007 highs—but as I’d read, this was normal. Markets ebbed and flowed.
Then disaster struck—no history lesson necessary. Right away we were in crisis mode, just like everyone else in the business. At age 23 I was sent out to explain to clients why they had half the money they did less than a year prior. We are a very active manager (meaning our portfolios look very different than the overall market) so in some cases we were doing even worse than the market. These were extremely hard conversations.
To get in front of as many clients as possible, I did many presentations to 50+ financial advisors. In one of my first presentations, I was trying to preach a focus on the long-term and the importance of discipline and sticking to one’s plan. Can you imagine being 50 years old and having a snot-nosed kid tell you to stay the course in November 2008? I tried to quote Goethe (“to say is easy, to do is hard, to do what you say hardest of all” or something like that). Only a punk philosophy major with limited experience would ever quote a German poet to people struggling with the fact that their financial life was in ruins. I was nervous as hell, forgot the quote, and stared in horrified silence at the audience for 10 seconds as I tried to collect myself. Suffice it to say I never quoted Goethe again.
A few months later, a colleague and I met with a financial advisor who refused to look me in the eye or shake my hand. I was the representative from the portfolio management team there to explain bad performance, and had my whole spiel ready. Instead of listening, the advisor asked my colleague what a “limp d—k little a—hole” like myself was doing in his office. He said I looked like I was 15 (I did) and had no business in his presence (I probably didn’t).
I mention all of this because I learned more about markets in those 12-months in front of clients than I did across all three levels of the CFA program. Markets are, at their core, about emotions and how you handle them. It is so easy to be brave from a safe distance, to say that you will be cool when the tough times come. During 2008-09, I learned that that is naïve bullsh*t. Those were terrifying times. I was worried to my core about my family’s future, the business, and all of our clients who had trusted us with their money. I convinced some to stay the course, but failed more often than I succeeded. I was yelled at a lot. I questioned my career choice. It is because of my tough early experiences that I spend more chapters in my book discussing investor psychology and emotions than I do discussing investing strategies. Strategy is important, but controlling your emotions is even more critical. It is what you do during markets like 2008 which determine your long term results.
For the first time in years, we have a choppier, down market. It has happened fast so far, as these things tend to:
There is no way of knowing how much more downside there is (if any). I do know, however, that if it gets worse, reason will be thrown out the window and emotions will regain their spot atop the market throne. Everyone will start to cherry pick all the bad facts and data about markets and the world. Advertisements on Zero Hedge will get more expensive. Schiff, Hussman, Rickards, and Faber will have their moment. System 1 will rise from its long slumber and crush System 2. Going to cash will be very tempting.
It is hard to act rationally as markets spiral downwards. For young investors specifically, this may be one of those rare chances to take advantage of volatility. Take your dollar cost averaging and up the amounts a little bit. Remember Buffett’s maxim that when you read a headline to the effect of “investors lose as market falls,” you should re-adjust that headline in your brain to “dis-investors lose as market falls, but investors gain.” Do that, and you’ll do well.
As Geothe said…(just kidding).