Who's Walking Who? Putting the Market Pullback into Perspective

“[There’s] an excitable dog on a very long leash in New York City, darting randomly in every direction. The dog’s owner is walking from Columbus Circle, through Central Park, to the Metropolitan Museum. At any one moment, there is no predicting which way the pooch will lurch.

But in the long run, you know he’s heading northeast at an average speed of three miles per hour. What is astonishing is that almost all of the [dog watchers], big and small, seem to have their eye on the dog, and not the owner.” – Ralph Wagner

The dog watchers, here, are the “market observers”, i.e., the people who watch the daily gyrations as if they mattered. If one wants to know where the dog is going one should watch the owner. With so much noise, we can expect to lose sight of the long view if we aren’t careful.

Fears of slowing global growth, our pending trade truce with the Chinese, the possibility of a hard Brexit, and turmoil in the White House are weighing on the market as of late. Understanding the difference between investing and speculating is essential to ensuring we maintain composure when the market seesaws. The hyperbole often comes from television talking heads and short-term investors who focus on the dog’s sporadic movements.

Merriam-Webster defines investment as, “the outlay of money usually for income or profit” and speculation as, “assumption of unusual business risk in hopes of obtaining commensurate gain.”

The similarity helps explain why the nightly news often conflates the terms. While the speculative investor’s activities are akin to sports betting, one can think of the long-term investors’ as wagers placed in a casino rigged in their favor.

Investing entails the development of a plan you can stick to, through all circumstances, that gets you where you want to be.

The dog watchers are not investors but rather speculators. Investors watch the owner, and here is his path over the last 50 years:

S&P Index Over the Past 50 Years (Log Scale)

Source: Clearnomics, Inc.

Source: Clearnomics, Inc.

$1,000 invested in 1969 is now worth over $25,000. This is why investors relax as the owner walks down the street, while the speculators bite their nails watching the dog.

In the preface to the 4th edition of Benjamin Graham’s The Intelligent Investor, Warren Buffet asserts that “to invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

As advisors, it is our job to maintain a sound intellectual framework for decision making and to communicate it to you.

Instead of searching for “winners”, intelligent investors use an evidence-based approach.

Learn more about our approach as a fee-only RIA in Knoxville, Tennessee.

Best wishes for the holidays,