Capital Preservation Paul, Part VII

Well, the best-laid plans…I’d intended to interview the contestants in our little investment contest to get their take on the markets and on how well or badly they, personally, had navigated the various challenges those markets had offered. I was especially interested in what, if anything, the contestants had learned. But I was mainly thwarted.

Lauren Buffett, for example, didn’t get to be the extremely low-profile sister of Warren Buffett by granting interviews willy-nilly to people like Your Humble Blogger. She begged off. Patient Patty was happy to talk, but she had no idea what had happened to her portfolio. Typical Tom talked all right—he ranted on endlessly about the unfairness of the markets and the lack of a level playing field. He had a long and tiresome list of excuses for his dismal performance and he swore he would never buy another stock as long as he lived. It wasn’t edifying.

Worst of all, even Capital Preservation Paul, being a very private investor, declined to be interviewed. When Your Humble Blogger looked like he might burst into tears, Paul did relent slightly, agreeing to let YHB listen in on the first quarterly meeting with Paul’s financial advisor following the end of the contest. That meeting began as follows (note that Paul’s advisor has the unusual name of Fry D. Blogger):

FDB: Gosh, Paul, you don’t seem all that happy for guy who just finished a terrific second in an exciting investment contest!

CPP (looking glum): Well, what do you expect? For sixteen straight quarters I was sucking wind, and I only pulled it out of the bag at the end. Probably, it was luck.

FDB: Nonsense! And what do you mean “sixteen straight quarters?” You beat everybody but Lauren during the Year 4 Bear Market!

CPP: Sure, but my results were still lousy in Year 4 in an absolute sense. How can I be happy about that? It seems that I’m unhappy about my portfolio ninety per cent of the time! Maybe you remember our quarterly meeting at the end of Year 4 when I offered to have you drawn and quartered and run out of town on a rail.

FDB (dismissing this with a casual wave of his hand): All my clients were like that. I pay no attention.

CPP: I see. You knew all along it would turn out well.

FDB: Exactly. You did everything right—well, most things right, sometimes you ignored my advice to your peril. But generally, you were terrific. During the strong markets you did well in an absolute sense, but were still cautious, not letting your emotions get the better of you. During bad markets you protected capital. And when the market recovered after the Bear in Year 4, you were well-positioned for the recovery. All’s well that ends well!

CPP: But, seriously, Fry, there has to be a better way to do this! Over the five years of the contest I either lost to lousy investors – Years 1, 2 and 3—or did poorly in an absolute sense—Year 4. Do investors really have to be unhappy a lot more than they’re happy?

FDB: Hey, whoever said investing was easy? Did Sydney Crosby get to be Sydney Crosby by sitting home and watching Dancing with the Stars?

CPP: Well…

FDB: Look, my friend, I didn’t invent the way markets work and I didn’t invent the way the human mind works. My job is just to help you navigate those twin difficulties as well as possible. I mean, here’s the thing. If investing was easy people like Typical Tom would be rich. But investing is hard. It’s hard because markets are unpredictable and sometimes really lousy. And it’s hard because investors want to make emotional decisions and find it very hard to be patient and disciplined. But like it or not, patience is a key virtue in the management of capital – maybe the key virtue. You need to be patient during strong markets because under those conditions you’ll be losing to inexperienced investors. And you need to be patient during weak markets because under those conditions you’ll be losing money. Console yourself with the thought that during strong and weak markets other investors might look good temporarily, but they are positioning themselves for serious trouble down the road. Meanwhile, you’re looking weak temporarily, but you’re positioning yourself for success down the road. The long and short of it is that only people like Lauren Buffett and you are going to end up rich, and that makes the hard job of being patient worthwhile.

[During this long speech the glum frown on Paul’s face melted slowly away, then softened into a grin, then expanded into one of those magnificent, heart-stopping client smiles that warm the hearts of financial advisors.]

CPP: You know what, Fry? Your advisory fees are way too low!

Next up: Explaining Donald Trump