According to historical folklore, a common question posed to a new soldier during the American Civil War was, “Have you seen the elephant?” It meant something like, “Have you met the enemy?” Camp newcomers who had not yet experienced direct combat were viewed skeptically until they had survived the stress and terror of battle. Those units that had uncommon ability to maintain order and discipline on the battlefield were often recognized with names like “The Iron Brigade.”
While I have had the good fortune of never having to face the combat version of the elephant, I have seen it many times in the financial markets. My first elephant was on October 19th, 1987, when I was a young broker at Kidder Peabody and Co. in Philadelphia. I was 25 years old, with all of three years of investment experience. During the day now referred to as Black Monday, I remember never taking a seat. I stood the entire time, with my phone to my ear. It felt like the financial world was coming to an end. On that one day, the Dow Jones Industrial Average fell more than 22%.
Late in the day, I received a call from a client. I expected to have a conversation with a justifiably nervous investor. But he had seen the elephant on previous occasions in his long investment experience. He was a veteran. While much of the world panicked and sold, he bought. A short time later, his purchases (part of his normal rebalancing process) were very profitable. I learned a lot from him that day and over the succeeding 28 years.
While it’s not mortal combat, doing battle in the capital markets can sometimes feel like it is! We veterans who have seen the financial elephant know that not all investors will pass the test the first time they face sharp market declines. Some will panic and run. Some will freeze up and cower. A few will remain in the ranks and be disciplined.
That’s why one of the greatest jobs of your advisor is to help you maintain discipline and withstand seeing the elephant, whether it’s for the first or the 100th time. In addition to heeding the voice of experience, there are a few things that you can do to best survive your encounters with the elephant.
- Have an investment strategy that you can stick with. Changing your strategy in the heat of a critical encounter is more likely to end in defeat than victory.
- Tune out the trumpeting of the popular financial press. The financial press is often the long-term investor’s biggest enemy. In fact, sometimes the press IS the elephant. In its efforts to sustain round-the-clock ratings, the media often has a way of converting financial fleas into seemingly elephantine crises.
- Base your investment strategy on the evidence from academia – the stuff that has withstood the embattled tests of time.
If you keep those points in mind, your encounter with the elephant is much less likely to lead to financial defeat.
The year 2016 has started out on a difficult footing. Those investors who have seen the elephant before know to look past these sorts of skirmishes and focus on their long-term campaigns. They know to rebalance and remain disciplined. As Dimensional Fund Advisor’s David Booth has observed, “Where people get killed is getting in and out of investments. They get halfway into something, lose confidence, and then try something else. It’s important to have a philosophy.”
This strikes us as a wise way to soldier on.