According to folklore, a common question posed to new soldiers during the American Civil War was, “Have you seen the elephant?” Camp newcomers who had no experience with direct combat were viewed skeptically until they had survived the stress and terror of battle—the elephant. Those units that had an uncommon ability to maintain order and discipline in the face of battlefield chaos were often recognized with names like “The Iron Brigade.”
While I am fortunate in never having faced the combat version of the elephant, I have seen it in the financial markets many times. When I was a new bond trader in Chicago in the early ’80s, interest rates were climbing quickly in response to rising inflation, and bond prices were declining precipitously. You could say this was my first experience with the elephant. It was a scary time for a trading rookie. For that matter, it was a scary time for everyone. I watched grown men lose fortunes as bond prices collapsed and interest rates spiked higher. But I also observed traders growing wealthy by pressing against the crowds and soldiering on while others fled the markets.
The second coming of the elephant took place on the New York trading floor, on October 19, 1987. On that day, now referred to as Black Monday, the US stock market fell more than 22%. My friends and colleagues were on the verge of panic as financial markets seemed to seize up.
Then, on October 20, I watched an older trader stand in the pit buying up stock futures and call options. As the world froze and investors began to lose their nerve, he saw the drop as an opportunity. He told me that stocks always seem too expensive and that “panics” are the best buying points. I followed his lead, and the simple lesson stuck with me: buy low and sell high.
During my 15 years on the trading floor and 21 years as an investment advisor, I have experienced plenty of situations—tests, in a way—where it appeared the world was about to end, at least in market terms. Typically, the people who failed the tests panicked or weren’t properly prepared for these downturns. Those who succeeded were like that Iron Brigade: they held to their ranks and their discipline.
One of the greatest challenges as a financial advisor is helping our investors hold their ground when the elephant makes an appearance—whether for the first time or the hundredth. There are a few things that you can do to best survive these encounters with the behemoth:
- Adopt an investment strategy you can stick with. Changing strategies in the heat of a battle is more likely to end in defeat than victory.
- Tune out the trumpeting of the popular financial press. When the market is going down, all sorts of “experts” from the financial wilderness will pounce on the situation, changing financial fleas into elephantine crisis.
- Base your investment strategy on the evidence from academia and history, a mindset that has withstood the battle time after time.
It goes without saying, 2016 is off to a rough start. Gain some perspective on your portfolio by reviewing your financial plans and ensuring you are still on track for your current financial goals. Most will find that despite the recent drop, they are on course. As Dimensional Fund Advisor’s Chairman David Booth observed, “Where people get killed is getting in and out of investments. They get halfway into something, lose confidence, and then try something else. It’s important to have a philosophy.”