January 20, 2009
At the end of this exercise, you and your client will have jointly created a list of reasons to be anxious in the short term. And by adding concerns beyond the ones that clients raise, you reinforce your position and credibility as providing balanced, objective advice, not just focusing on the positives.
Now it’s time to shift your attention to the right hand side of the page and say: “Are there any offsetting positives in the short term?”
Given the fixation in the media and among many investors on bad news, clients are likely to need help identifying short-term positives. Among the candidates for the right side of the page:
- Central banks have intervened in a coordinated fashion to contain the financial crisis to prevent bank failures and provide liquidity to the system
- Banning short selling in financial institutions should help stabilize some of the extreme speculation
- Dropping oil prices have reduced concerns about inflation around the world – giving central banks the ability to cut interest rates to add stimulus to the economy and putting dollars into the hands of consumers
- The U.S. appears to have turned the corner in Iraq – the prospect of withdrawing will take away a big drain on the American budget
- We can gain some confidence from strong leadership from people like Henry Paulsen and Ben Bernanke in the U.S. and European leaders like Angela Merkel, Gordon Brown, Nicholas Sarkozy and Jean-Claude Trichet of the European Central Bank
- The market correction has created what appear to be real bargains for investors who are selective – witness the large investments in Goldman Sachs and General Electric by Warren Buffett. There’s reason to believe we may look back upon this as an outstanding buying opportunity, particularly among some solid companies who have been beaten down and as a result are paying dividends of three, four or five percent.
Part Three: Putting current concerns in perspective
Once you’ve finalized that list, go on to say something like:
“At every given point in time, there are causes for optimism and causes for concern.
“If we had done this same exercise ten years ago in the fall of 1998, we would have listed threats from what was called the Asian contagion with the collapse in currencies in Asia and the Russian ruble and the implosion of Long Term Capital, a massive hedge fund that blew up and almost brought the global financial system to its knees.
“And if we’d done this exercise at the end of 1990, when the market was down sharply as well, we would have listed the recession in which the US found itself and the American S & L lending crisis (the last time the U.S. Government had to intervene), the broad slump in residential and commercial real estate and the huge uncertainty about the impending response to the invasion of Kuwait by Iraq that took place earlier that year.”
On this topic, I received a recent email from Art Schooley at The Personal Coach in Kitchener Waterloo. Attached was a December 1990 article from the Knight Ridder with the headline “Bank crisis risks turning recession into depression.” (If you want a copy of this article, Art can be reached at .)
The causes for concern in this gloomy article could be used verbatim today:
- U.S. banks going under at a level not seen since the 1930’s
- A resulting credit crunch and pull back on lending
- Plunging U.S. consumer confidence
- A 50% decline in stocks of leading banks like Citicorp
You could go on to tell clients: “Psychologists tell us that the human brain is unable to recall pain accurately – if we were able to do so, many fewer women would have a second child. As a result, we overestimate the level of pain we’re feeling today compared to the past; whenever we enter these kinds of market conditions, it always feels like it’s much worse than ever before.
“The tech bubble in 2000 was rationalized by investors who said ‘It’s different this time’. Today, we’re hearing people using the same words, saying today’s downturn can’t be compared to those of the past.
The aftermath of the tech crash reminded us why the words “It’s different this time” are considered so dangerous and costly for investors. It wasn’t different in 2000 and a strong case can be made that it’s not fundamentally different today, in fact that when it comes to market cycles, it’ never really different.”
Display article as PDF for printing.
Would you like to send this article to a friend?
Remember, if you have a question or comment, send it to .
