1. I think emotion is predictable, that is certain kinds of emotions lead to certain kinds of outcomes and mass consequences. When people are stunned by losses they are immediately angry and then anger soon turns to quietude or depression. Nothing much happens for a while because personal conviction is gone and apathy reigns. People "get along" or muddle through on inertia instead of conviction. 1931-35 was like that, and 1938-42, and 1974-82 and 1988-1992.
The mania of 1996-2001 was re-energized after 9/11 and continued on in family safety cocooning and cocoon equity extraction as marketers figured out the national mood and served it too well. The safety cocoon mentality has been dealt a major blow since 2005/2006 and won't recover for a good while.
Every normal asset class in developed and developing economies was driven to overvaluation, from bonds and stocks to real estate and commodities and currencies, since 1982 and 2002. Cash is now the most undervalued asset class and gold is next. Values are developing in stocks and real estate but liquidation will continue. Even gold is being liquidated but it is needed to validate cash in an inflationary time. cash validated by gold allows us to shop patiently for bargains before the next flight.
2. The 90 year old, sturdy, San Francisco fund and private money managers at Dodge & Cox and many, many others fell into a deep mine shaft this past year after decades of success. Their office was down the street from me, and I knew a few of their management casually. But many retired and new analysts and in recent years partners of a contemporary bent came on in droves who thought that conservative value investment principles were a simple formula of buying unloved stocks. I could see early last year that they were "losing it" and got out early. Their flagship Dodge & Cox Fund DODGX is down 41% on a total return basis on the past 12 months according to my FastTrack data base! Even more conservative operators over the past two decades like SGENX and LSBDX are down nearly 20% total return (including dividends) for the past 12 months. That's totally devastating and inexcusable.
There is no way that investors over 35-40 years of age can just buy and hold indexes or even solid managed funds and assume all will be well. We have to be diversified and we have to watch the investments like a hawk and cut them out when they start doing things price wise they haven't done before. Fire them when they start "acting bad" by moving to cash followed by thinking and looking. If we lose 40% in a year we have to make 67% the next year just to get back to where we were, assuming no taxes which could make it even worse.
Skepticism and fear of losses can serve us well, not stop loss orders. Money managers don't want you to move your money since they will lose the fees we pay them whether in mutual funds or separate accounts. Fund super markets like Charles Schwab, Vanguard, Fidelity, T R Price and others let us manage our own money if we will learn to do it. Otherwise we are doomed to mediocre performance. Mediocrity may work over a 50 year period when we are working and saving, but not when we need to live on our money. Get those concepts clearly in mind.
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