Thoughts On Money


Whitewashing a White Lie

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The Adventures of TOM …

In The Adventures of Tom Sawyer, we find Tom in chapter two spending his beautiful Saturday summer morning whitewashing a fence.  The chapter holds the title, The Glorious Whitewasher.  Mark Twain describes Sawyer’s discontentment with having to tackle this dreary task and missing out on all the opportunities the day had to offer.

“He [Tom] surveyed the fence, and all gladness left him and a deep melancholy settled down upon his spirit. Thirty yards of board fence nine feet high. Life to him seemed hollow, and existence but a burden. Sighing, he dipped his brush and passed it along the topmost plank; repeated the operation; did it again; compared the insignificant whitewashed streak with the far-reaching continent of unwhitewashed fence, and sat down on a tree-box discouraged.” 

We go on to read that Tom tries to offload this work with no success; he looks for opportunities to pay another for the duty but doesn’t have the riches to compensate for the task. Then the story shifts and a light bulb goes off for Tom.  We enter the story here when a friend Ben is walking by,

“Hello, old chap, you got to work, hey?”

Tom wheeled suddenly and said:

“Why, it’s you, Ben! I warn’t noticing.”

“Say — I’m going in a-swimming, I am. Don’t you wish you could? But of course you’d druther work — wouldn’t you? Course you would!”

Tom contemplated the boy a bit, and said:

“What do you call work?”

“Why, ain’t that work?”

Tom resumed his whitewashing, and answered carelessly:

“Well, maybe it is, and maybe it ain’t. All I know, is, it suits Tom Sawyer.”

“Oh come, now, you don’t mean to let on that you like it?”

The brush continued to move.

“Like it? Well, I don’t see why I oughtn’t to like it. Does a boy get a chance to whitewash a fence every day?”

That put the thing in a new light. Ben stopped nibbling his apple. Tom swept his brush daintily back and forth — stepped back to note the effect — added a touch here and there — criticised the effect again — Ben watching every move and getting more and more interested, more and more absorbed. Presently he said:

“Say, Tom, let me whitewash a little.”

Many of us know the rest of the story and sure enough Ben and a handful of other spectators passing by would happily take the load off of Tom.

It’s All Perspective

Quite a funny story and a memorable one, but what fascinates me most about this tale is the constant shifting in perspective.  We have Tom singing his woes of the task at hand, we have Ben initially mocking Tom, and then we see the boys swap roles.  What a turn of events.  Kind of reminds me of a big brother convincing a little brother to exchange his measly quarter for two shiny new pennies.  Here’s the takeaway that I gather,

When we walk into a situation without all the facts, we become impressionable.

If Ben would’ve seen Tom just moments before as he was slugging around the paintbrush, he would’ve been much less impressionable.  If the little brother only knew the value of a quarter and the value of a penny, he would’ve been much less impressionable.  Gaps in the story allow the storyteller to reframe the narrative.  This is where our TOM journey begins, with my discontentment of how the media tends to mislead us about volatility.

Topics of Interest

I am a financial advisor, my friends and family know that I am a financial advisor, so as you can imagine we sometimes engage in small talk about markets, stocks, etc.  You know what I have become really good at? Predicting the particular topics that we might discuss.  Because I am a mind reader? NO! Not at all.  Because the topic du jour will be whatever is captured in the headlines that week.  Perhaps it was BREXIT or Bitcoin or a looming recession – the subjects change but the embedded fear around them is all the same.

So where does this “embedded fear” I speak of come from?  The media outlets.  Not all of them, but most of them.  The headlines need to sell the story, so they need to incite excitement and intrigue, and fear can do this.  I was listening to a podcast just this week and two authors/contributors were talking about how frustrating it is that they can’t pen their own headlines.  They were talking about how much criticism they received from their peers regarding the disconnect between their headline and the content.  Their response, “We don’t write the headlines!”  This job is reserved for CNBC or Bloomberg or Yahoo! Finance. This allows the editor to create a title that will draw the most clicks, the most attention, the most eyeballs aka “clickbait.”

None of This Matters… Until it Does

So, are these headline clickbait tactics sleazy? Of course, they are, but in isolation, if not acted upon, I suppose they are fairly innocent.  Here in lies the problem though, they are often acted upon en masse (a fancy French phrase meaning “all together.”)  I talk to folks all the time that make investment decisions or build their investing philosophy on top of these fearmongering headlines.  As I said, when we walk into a situation without all the facts, we become impressionable.

Don’t get me wrong, I totally get it.  These headlines catch a lot of airtime, they populate our news feeds, and they dominate our water cooler conversations – I get it.  It’s hard for these not to create some sort of impression on us or color our perspective in some fashion.  But hey, that’s why you are here – you read TOM because you are interested in learning, you are interested in expanding your investment acumen, and you are interested in potentially challenging your presuppositions about money.

Exhibit A

Many readers commented on a chart that I shared in an article a few weeks ago titled, Weathering The Withdrawals.  It was actually a really simple chart, just the S&P 500 returns for the last 90 years.  No matter how many times you’ve seen it though, it is pretty impressive. In one chart you capture all the innovation, ingenuity, and relentlessness of the US economy.  So here it is again:

(A special thank you to Professor Damodaran and NYU Stern for organizing and making this data easily accessible)

Now, taking into context the impressive compounding results of the table above, let’s look at one of the most famous investing cover stories of all time – BusinessWeek, August 1979, The Death of Equities:

Source: Business Week Archives

I don’t know about you, but “the death of equities” does not sound like an attractive time to be buying equities, right?  But, was it a good time to start investing in equities in August of 1979? Let’s go to the numbers:


Source: NYU Stern

The returns reflected above, the 1 year, 5 years, 10 years, and 20 years post headline are not good returns, they are PHENOMENAL returns.  The returns for the 90 years that we reflected in our previous table had an annualized nominal return (dividends reinvested) of 9.74% and 6.54% real (adjusted for inflation).  All this to say, these returns following this famous headline were above average.

Can you see why headlines can make for misleading financial advice?

So, What is Volatility?

Many of these headlines are going to stem from times of increased volatility, much like this year. Perhaps you’ve heard that word on the news or maybe your advisor has mentioned it, but what does it mean? Here is how Webster dictionary defines it, “a tendency to change quickly and unpredictably.”  In reference to the stock market, volatility is referring to the changing of stock prices.  On a stock exchange, millions of participants are buying and selling their stocks and the exchange is reflecting the price of that last transaction.  Sellers have an asking price and buyers have a bidding price, the goal of the exchange is to create a platform in which buyers and sellers can meet and transact at an agreed upon price.  Just like our definition articulates, these prices do change quickly, as they would in any type of auction environment and they are unpredictable, as are most things in life, we just don’t know what the future has in store.

This all seems pretty normal and reasonable, so why does volatility have such a negative connotation?  Because the financial industry has deemed volatility as the measurement of risk and the words volatility and risk have become quite synonymous.  We are human, we don’t like risk.  We are wired to run from danger and risk is a word that insinuates danger.

Perhaps though, we should redefine risk for ourselves.  We all strive to be great investors and in order to stay the course and to benefit from the long-term fruits of our investments, we need to really understand what risk is and how it differs from volatility.  Let’s borrow a simple definition provided by David Bahnsen, “Risk is the possibility of permanently losing money.  Volatility is the expected fluctuation in value as we advance towards our goals.”

One More Note on Volatility

Here’s one of those aha moments for me while thinking about volatility all week.  At that moment, I literally woke up in the middle of the night and typed these words into my notes section on my phone, “Volatility is a byproduct of liquidity.”  Liquidity means how quickly and easily you can convert an investment to cash.

So, let’s break down this train of thought – if you want liquidity you need lots of buyers and sellers, if you have lots of buyers and sellers it will come with a lot of opinions, emotions, etc., and this fluctuating sentiment will result in varying prices – volatility.  In a sense, the benefits of liquidity may be inseparable from some measure of volatility, big or small.  Think about real estate, it is a less liquid market (than the stock market) and prices aren’t as easily available, which can make it also appear to be a less volatile marketplace.

Why does this little truth matter to me?  Because it helps me to shift my perspective.  I should embrace volatility, it’s a product of having a really liquid market.  I can essentially access my capital at any time.  That doesn’t seem risky to me, that seems comforting.  It’s realizations like this, those that shift your framing, which I believe will mature someone into being a great investor.

Moral of the Story

The general media is out there to sell newspapers or in today’s day and age generate web traffic. The headlines are made to be edgy, to draw attention, to suck you in.

Please do not build your investment philosophy off of headlines.

They will often try to misinform us about volatility and risk, we need to define those terms for ourselves.  Any gap in our understanding will be a foothold for someone else to create an impression on our philosophy.

I couldn’t end an article on the misperception of risk and volatility without this great quote from Cullen Roach on Twitter, “The stock market is the only market where things go on sale and all the customers run out of the store….” or another I’ve come to appreciate from Morgan Housel, “Every past decline looks like an opportunity, every future decline looks like a risk.”

Twain’s Tom Sawyer has a lot in common with the TOM you are reading – they both wish to be a little smarter than the average bear. 🙂

I pray everyone has a wonderful Christmas! TOM wishes you the best.

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The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

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