Matt Peak Newsletter - "Wonderful Life" Edition
Living through a pandemic, which socially separates us during economic turmoil, can be tough on the goal-focused investor. I’m keeping up this newsletter effort to help get clients through all this without making mistakes. This week, I want to help re-frame how we think about our wealth amidst turmoil.
You’ve probably seen the movie classic It’s a Wonderful Life. The main character, George Bailey, is an officer at a family run bank in Bedford Falls, New York in 1945. As the cynical, but hardworking George Bailey is finally catching a break in life, literally driving off on his honeymoon, he sees a commotion. Panicked people on the street are telling everyone else, “there’s a run on the bank, you’d better get your money!”
Calling off his honeymoon, George rushes back to his bank and tries to calm the customers crowding his lobby. He manages to persuade many to just take what they need, even using his honeymoon cash. Meanwhile, George’s wealthy, sinister competitor Mr. Potter, who owns the rest of the town, makes an offer. “I’ll pay your customers 50 cents on the dollar for each of their shares.” Word gets out, and one panicked man, rushing to protect his hard-earned wealth, says “Potter’s offering 50 cents on the dollar, 50 is better than nothing!”
Financial crises seem to have one thing in common—a desire by many to convert assets quickly into cash. With many trying to sell assets, but few buyers, prices drop. There is always a Mr. Potter out there willing to buy your shares.
Though goal-focused investors of today have plenty of advantages over George Bailey’s bank customers, we’ve still inherited some of their views. We view dollars and shares as the same thing. When we open our statements, we skip the gibberish about number of ‘shares’ we own and go straight to the part we like—the number of “dollars” in our account, as if it’s a bank account. But we don’t own “dollars in a bank account,” we own shares of companies. During market volatility, this ‘wealth as dollars’ view leads to disappointment. The solution is to view our wealth for what it is—shares of companies, not dollars—and when times are tough, don’t sell your shares to Mr. Potter!
One advantage of being a goal-focused investor is that she can choose when to buy and sell. Even a retiree (who’s no longer buying) only sells a few of her many shares each month through a potentially 20-30 year retirement, allowing the rest of the shares the potential to keep growing. The other advantage of owning shares of profitable companies instead of dollars is that historically companies have increased their profits, thus value, even with temporary interruptions. If your parents invested $1000 in the Dow Jones Industrial Average stocks for you, right after watching It’s a Wonderful Life Jan. 2nd1945, today it would be worth $2,557,045.92 as of March 26th….(for some fun and perspective, go plug in your birthday at this site [1])
While I’ve talked mostly about volatility of stock prices, many investors have also been surprised by volatility of their bond or fixed income investments. As the large fixed income mutual fund house Lord Abbett has observed, corporations have been selling tons of bonds and tapping their lines of credit to raise cash to get them through the near term slowdown[3]. Corporations that own bonds, it seems, are a little like George Bailey’s customers trying to get their hands on cash.
Thankfully, earlier this week the Federal Reserve stepped in to help ‘ease liquidity concerns’ by lowering interest rates, opening new bank lending windows and announcing unlimited plans to buy bonds—an unprecedented move to get more cash in circulation.[4] (Imagine if the Fed sent an armored truck to help get extra cash to George Bailey and customers in his crisis.) Add in the $1.8 trillion federal stimulus to offset the economic impact of the coronavirus response and the picture looks a little brighter. Above all else, morally, and otherwise, we need to help save lives and contain the spread of the virus. As I wrote last week, researchers and scientists are working at breakneck speed to develop treatments, and this week the World Health Organization launched an unprecedented “megatrial” globally to track the success of 4 major treatments that needed more study.[2]
Re-frame your thinking about wealth if you need to. Have confidence that we’ll get through this. Contact me if you need to. But above all else, don’t let the bad news keep you from doing the right things.
[1] https://us.spindices.com/indexology/djia-and-sp-500/birthday-calculator
[2] https://www.sciencemag.org/news/2020/03/who-launches-global-megatrial-four-most-promising-coronavirus-treatments
[3]https://www.lordabbett.com/en/perspectives/fixedincomeinsights/whats-driving-price-volatility-in-short-term-credit-markets.html
[4] https://apnews.com/6c0d9cf9a147e380ab27ef1641cffad9
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The Dow Jones Industrial Average is an unmanaged index and you cannot directly invest into an index. The hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. This example does not represent any specific product, nor does it reflect sales charges or other expenses that may be required for some investments.
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