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Feb 18, 2021

Rational Behavior During Irrational Times

Sponsored Content provided by Connor Keller - Managing Director, Live Oak Private Wealth

“A genius with poor emotional control can be a financial disaster. An ordinary person with a handful of behavioral traits can be wealthy.”
– Anonymous

As we look back on 2020, it is hard to imagine we would now be in a place where the markets are hitting all-time highs. Think about all that we endured this past year — remote work, online school, Zoom meetings, masks, hand sanitizer, and widespread shutdowns were the new norm. We isolated ourselves amongst our family or in small groups where we felt safe. We ordered in, instead of going out. Heck, we ordered in everything — even the FedEx guy knows your dog’s name! Not to mention it was an election year unlike any other. Is this the type of environment that fosters double-digit returns across most major indices?

As of December 31, 2020:

  • Ten Year Treasury of 1.01%*
  • S&P at 3756 (12/31/20) record high*
  • DJIA at 30,606 (12/31/20) record high*
*Sourced from Wall Street Journal

2020 was also a year where:
  • Stocks with zero earnings or revenues were trading at lofty valuations
  • One had an outsized reaction to economically irrelevant stock splits
  • Massive trading volumes in speculative investments like options and worthless stocks
  • Many commentators saying the bubble we are in is reminiscent of a prior one
  • In June the price of oil went negative
With the turn of the calendar, the markets proved to be resilient and continued to provide positive returns. In addition, a group of retail traders at @wallstreetbets tried to take on “the establishment” short sellers in companies like Gamestop (symbol:GME). The short squeeze that occurred in GME pushed the stock from $20 a share to over $483 on 1/28/21, according to CNBC. This extreme volatility is reminiscent of prior periods in markets where stock prices become dislocated from their true worth. People seemed to think of the stock market as a game. Speculative investing (or gambling) is fun, when it is successful! This type of behavior has many professionals scratching their heads.

“Another mistake that people often make is that they compare themselves with others who are making more money than they are and conclude that they should emulate the other’s actions…after they’ve worked. This is the source of the herd behavior that so often gets them into trouble. We’re all human and so we are subject to these influences, but we mustn’t succumb. This is why the best investors are quite cold blooded in their professional activities.” – Howard Marks

During times like these we believe it is important for equity investors to stay disciplined to their plan and how they behave. In fact, it is very easy for investors to want to chase the “winners” and ignore the “losers.” This type of behavior referred to in the quote above is what I like to call the FOMO trade — the Fear of Missing Out! You will always know people who talk about how much money they made in a particular stock. It is normal for people to boast about the outsized gain they made in a particular stock this month, or week. Now think about how many times you have heard someone brag about their portfolio of wonderful businesses that have proven to perform in good times and bad. Maybe these are the people we should pay attention to.

We believe our team at Live Oak Private Wealth does a great job of creating comprehensive financial plans and portfolios for our clients. We also stress that the behavior of the investor is paramount to successful investing over time. Ask yourself some simple questions: Are you comfortable holding cash in a rising market? Do you tend to want to invest in the “what’s working now” stocks? Do you think of yourself as one who experiences FOMO and wants to follow the herd? How will you feel if the markets decline 30%? Did you want to buy or sell during the market downturn of March 2020? How would you feel if your assets doubled every 10 years? The answers to these simple questions can help determine if you can be a successful investor over time.

Why is behavior so important to successful investing? Everything has a price, a fee for admission. In investing, that price is the volatility of the market — the fear and uncertainty related to the ups and downs. These are the “fees” of investing, and they are not paid with dollars. Rather, they are paid by your behavior. The behavior that allows you to stay invested over the long term will produce the best results. It is not necessarily about earning the highest returns, it’s about earning decent returns that can be repeated for many years. One must be willing to accept the volatility in order to earn the returns.

“Compounding only works if you can give an asset years and years to grow. It is like planting oak trees. A year of growth will never show much progress, ten years can make a meaningful difference, and fifty years create something absolutely extraordinary.” – Morgan Housel

For further study on the behavior of successful investors I recommend “The Psychology of Money: Timeless Lessons on Wealth, Greed and Happiness” by Morgan Housel. In this book, the author dives deep into the importance of your mindset. It’s much less about what you know, and more about how you act.

During the beginning of the year, many folks in our industry will issue forecasts for the next quarter, year or beyond. The financial media loves to publish or broadcast all these forecasts, most of which are usually bullish. While being aware of such forecasts can be helpful, it is much more important for one to be completely comfortable with their own risk. Further, try to ignore the noise. The volatility of your equity investments is the price you have to pay to garner the returns necessary. Be rational and try to avoid the temptation to sell when markets are down. When talking to equity investors, we want them to understand how behavior can affect the long-term performance of their plan and their portfolios. Allocate stocks you can live with during different market cycles. This mindset of being comfortable with the volatility and staying invested over their time period will determine your success.
1. The information contained here is not complete, may change, and is subject to, and is qualified in its entirety by, the more complete disclosures, risk factors, and other important information contained in Part 2A or 2B of Form ADV. This commentary is for informational purposes only and does not constitute an offer to sell or as a solicitation. ​

2. Live Oak Private Wealth is a subsidiary of Live Oak Bank. Investment advisory services are offered through LOPW, LLC, an Independent Registered Investment Advisor. ​Registration does not imply a certain level of skill or training.

3. Opinion and thoughts expressed are those of Connor Keller and not Greater Wilmington Business Journal. 

The information included in this article is neither tax nor legal advice.

Connor Keller is a Managing Director at Live Oak Private Wealth. Connor leverages his extensive experience in options trading and passion for custom investment strategies to provide insight and direction to the asset management team. He is involved in asset allocation, investment policy and portfolio management, while also serving on the Investment Committee.
Connor joins Live Oak Private Wealth with more than 20 years of experience in investment management and brings a focused expertise in options trading. He previously served as a senior relationship and portfolio manager for a large regional brokerage and investment banking firm. In that role, he worked closely with individuals, foundations, non-profit organizations and corporations to develop and improve their investment management process. Connor is a graduate of Denison University. When he’s not hard at work, Connor enjoys spending time with his wife and their three daughters.

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