Swedroe: Don't Derail Your Plan Over Greece

July 24, 2015

Investors certainly have enough to worry about these days. In addition to concerns about the Greek crisis itself, a lot of investors are worried about the risk of it spreading. Greece did indeed default on its International Monetary Fund (IMF) loan, but has since repaid it with the new rescue package it received.

Many of these investors began envisioning a repeat of what's come to be called the Asian Contagion, which started in Thailand in the summer of 1997 and then spread throughout Southeast Asia.

Its effects were felt around the world as stock markets from Russia to Europe and the United States suffered bear markets. This crisis led to the failure of what, at the time, was the largest hedge fun in the world, Long-Term Capital Management, which in turn threatened the entire financial system.

From a high of 1,190 on July 20, 1998, the S&P 500 plunged to a low of 923 on October 18, 1998, a drop of almost 23 percent in just three months. The NASDAQ fared much worse, falling from a high of 2,028 on July 21, 1998 to a low of 1,334 on October 8, 1998, a drop of more than 34 percent. No wonder investors are concerned.

And if the risk of contagion wasn't enough, during the most recent Greek crisis the markets had to contend with a sharp drop in the Chinese stock market and the likely default of Puerto Rico. Add to that the negotiations with Iran, along with the rest of the serious problems in the Middle East. Finally, markets were further concerned about expected action from the Federal Reserve to raise interest rates in the near future.

Stick With The Plan!
Given all these anxiety-causing events, what should investors do? Whenever I'm asked to comment about concerns such as the ones mentioned above, or about a particular forecast of doom and gloom by some market "guru," I address the issue in the following manner.

I begin by asking: Can you detail for me the list of issues causing you so much alarm that you are considering abandoning your well-thought-out plan, which is already built to anticipate that such events will occur in an unpredictable manner? If the issues are genuine—sometimes they arise from the words of "crackpots" who predict end-of-the-world scenarios—I will generally agree that they might be of legitimate concern.

However, I then proceed to ask: Are you the only one who knows these facts, and are you the only one concerned about them? The obvious answer is "no." Which leads to the next question: Do you think all the smart people at firms such as Goldman Sachs and Morgan Stanley, and all the hedge funds and institutional investors (who can do as much as 90 percent of the trading, and thus set market prices) are unaware of these issues/facts? Again, the obvious answer is "no."

Finally, I point out that, therefore, it must be true any views/estimates/forecasts of what is likely to happen are already embedded in prices, and thus it's too late to act. Unless you think you can forecast better than the market in all its collective wisdom, you should do nothing.

Forecasters Usually Fail
I also cite the research showing that there are no good market forecasters (and that certainly includes "gurus" who regularly appear in the financial media, such as Dr. Mark Faber, Nouriel Roubini and Peter Schiff) and recommend two of my favorite books on the subject of forecasting accuracy, "Expert Political Judgment" by Philip Tetlock and "The Fortune Sellers" by William Sherden.

Lastly, I ask: Who do you think is the smartest investor of our generation? The obvious answer, and the one I most frequently receive, is Warren Buffett. I then ask: Do you think that Buffett is selling based on the current situation or some "guru's" forecast?

Since Buffett says his favorite timeframe for holding a stock is forever, and his advice is to not time the market (but if you're going to do so, then buy when others are panicking) again the obvious answer is "no." Which leads to the question: Why do you think you should act? Are you smarter than Buffett?

I close by reminding investors that Buffett has stated that he continues to make more money when snoring than when he's awake. And then I hand them a copy of my book, "Think, Act, and Invest Like Warren Buffett," and advise them to go home and read it.

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