2nd Quarter 2017: Bedpans and Bull Markets

BEDPANS AND BULL MARKETS

I called home from college in the spring of 1989 to let my parents know that I had decided to go down to Wrightsville Beach that summer to find a job. I figured I could bus tables in a restaurant in the evenings, catch the late-night parties and hang out on the beach all day. Of course I didn’t use that precise wording when telling my parents of my plans but I thought I made a pretty good case for myself. At the time I was just finishing up my freshman year and frankly, things were going pretty darn well. I had done fine academically but more importantly (to me anyway) I had never had more fun. You likely remember it well; for the first time in life you enjoyed total freedom from adult supervision. I cherished the independence, my new friends, the parties, ACC football, road trips, and of course, all those babes at Wake Forest! Life was good. A summer at the beach would be the perfect way to keep the party going.

Frank Bragg felt otherwise. There was no discussion. “Nope. Be home the day after your last exam.” My summer at the beach never materialized. Those of you who know my father might know that he has strong opinions on raising children. With regard to children making decisions for themselves, Dad has been known to say, “Of course my kids need to learn how to be good decision-makers. But until they reach the age and maturity that they make the same decision I would make, I’ll make all their decisions for them.” Apparently I was still a child. And thus it was that I found myself working as an orderly at Presbyterian Hospital during the summer after my freshman year of college. As Dad put it, “Son, you need a reality check. Life is not a party. You are not the center of the universe. I’m not spending fifteen thousand dollars a year for you to go live in a self-centered bubble.”

Nancy Snapp was the beloved, long-time head of nursing at Presbyterian Hospital. For thirty years, Bragg Financial handled the retirement plan and other benefits at Presbyterian so Dad knew Nancy quite well. He apparently asked her to give me a job doing something that might bring me down a notch or two. As he put it, “Nancy, the boy needs some sensitivity training.” Nancy had just the thing for me. I went to work on the sixth floor of the hospital where many of the sickest patients received care. Most of these patients were elderly and frail. Many were near the end of their lives. My duties included changing bed linens, changing hospital gowns and emptying bed pans. These patients needed to be bathed, weighed, fed, lifted and transported each day. This I did. All day, every day. For a healthy, confident, nineteen-year-old, big-man-about-campus, my summer job was like a visit to another planet. Here I was sponge-bathing a ninety-five-year-old man when my pals were hanging out on the beach! It was hard. Frank Bragg loved it! And you know what? By the end of that summer I was grateful that he made me do it. Working at Presbyterian exposed me to aspects of life and humanity that I had not known. In addition I was privileged to have co-workers who were the most caring, dedicated, and hard-working individuals you’ll find.

Like the over-confident, nineteen-year-old Benton Bragg, investors today need a reality check. The market has been on a roll. US stocks have done well, foreign stocks have too, and even bonds have contributed. Portfolios are flush. Admit it: your portfolio is worth a lot more than you imagined it would be as you worried through the great recession eight or nine years ago. I wish we at Bragg could take credit for this state of affairs, but we can’t. To paraphrase famed investor Humphrey B. Neill, never confuse a bull market with brilliance. Sure, we have done what you hired us to do: build the portfolio, remain diversified, rebalance with discipline, keep the costs low and minimize the tax bill. But like you, we’ve been pleasantly surprised with the market’s sustained strength, the remarkable length of this rally and the relatively smooth ride we’ve enjoyed.

Investors have become a bit complacent. We’ve even sensed in some of our clients a bit of the swagger of a nineteen-year-old college student. Such is the human condition. The further we get from a period of great pain, fear and uncertainty, the more we discount its significance. We explain away what happened with the benefit of hindsight. We readily accept higher levels of risk and we project the recent past far into the future. In some ways we should be thankful for this human characteristic; as we’ve written before, without risk-taking, early man likely wouldn’t have emerged from the cave after his first brutal fight with the mighty mastodon. But he did emerge and he embraced risk. And just look at the remarkable progress he has made since.

But this risk-taking characteristic also makes us vulnerable to making decisions that lead to loss. Ironically, risk is greatest when there is no perception of risk. We’re at our most vulnerable when markets are high, when the headlines are positive, when portfolios are flush, when there is no “fear premium” in the market and when investing is “easy.” That’s where we find ourselves today. Earlier this week I read a headline from the New York Times that read: “Fed Chair Yellen Expects No New Financial Crisis in Our Lifetimes.” I found that statement less than reassuring as I recalled then Fed Chair Ben Bernanke’s comment on the eve of the financial crisis in 2007: “We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.” Janet Yellen’s proclamation is one of many “good-news” headlines we’ve read lately. In contrast, recall the headlines in 2008 and 2009. Recall your own fears and emotions back then as the market fell 55%, the economy slowed, the banks failed and job losses mounted. Remember your resolve to spend less, to work longer, to save more and to reduce risk in your portfolio. Fear was acutely prevalent. But hindsight makes it clear that we should have “backed up the truck,” as my dad likes to say, and loaded up on stocks. That was the time to be bullish.

But no one wanted to be bullish back then. Even our bravest clients who always “bought the dips” were in retreat back then. A fair number of clients asked us to reduce stock exposure even after prices had fallen 30% or 40%. Many more clients asked us not to rebalance. “Hold onto my bonds and cash; don’t add to stocks,” we heard many times. I’m not being critical—I’m just making the point that we’re all human and emotion is a powerful force. Our humanness was on display back then and we must acknowledge that it is on display today as we enjoy brimming portfolios and worry far less about our financial position.

So once again, a reality check from Bragg Financial. Are we suggesting that a market decline is nigh? We are not. We of course can’t see the future; the bull might run for months or even years. Likewise, it might not. We are suggesting that for the last eight years we’ve enjoyed a sustained one-direction market with very few declines of any significance. Normal markets are volatile and we should tell ourselves that the good times won’t last forever. At Bragg, we are rebalancing portfolios. In general we are trimming stocks and adding to bonds—selling what has done exceedingly well and buying the boring stuff. Put your emotions aside and be glad.

On behalf of the whole team at Bragg, thank you for choosing us for your planning and investing. Have a wonderful summer!