We’ll Get Through This

Mar 9, 2020 by Morgan Housel

In the 1930s an Ohio lawyer named Benjamin Roth kept a detailed diary about what he saw during the Great Depression.

In the late 1930s, when the depression had mostly passed, he summarized a few points he had learned from the debacle. He wrote:

“Business will always come back. It will remain neither depressed nor exalted.”

“The stock market forecasts business in only a limited way. The beginning of a stock market movement usually is caused by the trend of business but in the end the movement is carried too high or too low—by the extreme optimism or despair of human nature.”

“Depression is time of greatest profit. The investor who has liquid funds and the courage to act can lay the basis for great profits.”

It’s silly to compare the last week to the Great Depression – unemployment is near a record low and the market is still up over the last 10 months. It’s also hard to think of a time when sentiment has changed so far, so fast, than the last week. And what’s really silly is to assume that abrupt shift won’t both feed on itself and lead to tangible economic problems.

But let me offer some advice, echoing Benjamin Roth’s lessons from 90 years ago: We’ll get through this.

It won’t be easy, and for some it will be agonizing. But no one should be surprised when a market economy that offers so many benefits occasionally asks something in return.

Keep a few things in mind.

1. Booms plant the seeds of busts. Busts do the same in the opposite direction.

There are no exceptions to Newton’s third law of physics. Every action has an equal and opposite reaction.

It’s tempting to fall for the siren song of booms because it’s so easy to extrapolate a positive trend without accounting for its offsetting factors. Booms make people complacent, assets expensive, and businesses fragile – all of which are easy to discount and hard to even measure when things are going well. It’s usually only in hindsight that we look back and realize how oblivious we were to the forces building up against us.

The same thing happens in reverse during busts. Relative to literally five hours ago, people are more aware of the risks they’re taking, businesses are looking for ways to get more productive, and assets are priced for better future returns – all of which are easy to discount and hard to even measure when things are falling apart.

It’s strange to think that we’re better positioned for future growth this week than last week. How can that be, given everything that’s happened? Well, it may get worse. But every step down plants the seeds for the next ride up.

2. Compounding is not about earning the highest returns. It’s about earning pretty good returns for the longest period of time possible.

Earning 20% a year and getting washed once a decade will leave you worse off than earning 8% a year and being able to hold your ground when times get rough. That’s so obvious. But it’s times like this that you realize financial “survival” is not just relevant to the broke and paranoid; it’s the single most important ingredient to long-term growth.

“Survival” means different things. It means having a strategy whose downsides you’re preemptively familiar with, so you’re prepared both psychologically and financially when they occur. It means being able to make decisions without being handcuffed by the timeline of debt repayment. It means having a huge gap between what could happen and what you need to have happen to do OK.

To continue reading, please go to the original article here:

https://www.collaborativefund.com/blog/well-get-through-this/