August 19, 2011--David's Question

David is friend of at least 40 years standing and for most of that time has managed his family's money. There is quite a lot of it and so he has been busy and taken his responsibility seriously.

Since 1990, when he retired early from AT&T, he has spent nearly full time studying markets, financial instruments, and the vagaries of economic theory and history to better enable him to do due diligence for his close relatives. He is very smart and thorough and thus he and they have done quite well.

He is a devoted student and advocate of prudent and diversified investing. His formula for the deployment of his family's assets conforms to the classic buy-and-hold approach--do not be tempted to trade excessively, especially do not panic as the result of day-to-day, even year-to-year fluctuations in the various financial, commodities, bond, and real estate markets. Make strategic decisions and stick to them. Edit investments, for sure, but never do anything emotional or rash. Hold true to the plan. Let others do the panicking. History tells us, he always says, that things behave cyclically; but over time they return to long-standing patterns and formulas.

He was in Maine for a few days and so midday yesterday we met for coffee. The Dow was down at that point by about 400 points, a nearly 4.0 percent decline. I was concerned and so looked across the table to him; but before I could say anything, as if reading my mind, he asked, "Do you have any idea what's going on?" I knew he was talking about the financial markets.

"That's what I was about to ask you! Since knowing you, every time there have been gyrations in the market I asked you that question and you always had a calming answer. And so . . ."

"And so indeed." He had for him a wild look in his eyes. As if talking to himself, he said, "For months I have had no idea what is going on. I understood the collapse of the real-estate-derived bubble; but germane to your question--to my own question--I have no idea why recently we should be seeing such wild swings. First the major averages doubled since their low point in late 2008, early 2009. The Dow, for example, regained a substantial part of what had been lost. It nearly doubled. But from that point on, we have seen what we are now seeing."

"It's very disturbing," I confessed, "to hear you of all people talking this way. Why you . . ."

"I agree. I can't believe I'm saying these things. My belief in market fundamentals, my knowledge of economic history has stood me in good stead over the decades when we experienced various booms and busts. The most recent the dot-com collapse of the stock market. But I cannot say that anything I know or have learned provides any comfort or understanding of the current situation."

"But wouldn't you in the past have seen what we're enduring as cyclical? More like the dot-com situation?"

"Yes, but this seems very different. It feels more like a fundamental restructuring of the global economy in ways, and in directions, that I cannot understand or predict."

"What about what economists have to say? Are any of them making sense to you?"

"Not really. People I have been following for years, who have good track records and have influenced me are equally befuddled and are sending contradictory messages. If they were honest, they would say what I just said--that they have no idea what's going on."

It was past 2:00 p.m. and he had to leave for New York in order to avoid having to do too much driving after sundown.

We paid the check and got up to leave. He then did something he had never done before--he turned me to face him and reached out to hug me. As he did, he said, "Try to hang in there. Maybe something good will come of this. This has been true in the past."

I was surprised by his emotion. He has always prided himself for being cool and calm in a crisis. "But this time," he said wearily as he turned to go, "I'm no so sure."

And with that he was gone.