View from the Chair: Windermere's Market Perspectives (March 2019)

We all like to think we are fully rational human beings, capable of staying in control of our emotions and making sound decisions in all areas of our lives - especially when it comes to investing. When markets are steady and moving in a upward trajectory, many of us are able to operate in a “calm, cool, and collected” fashion. However, when volatility arises and markets correct, we tend to lose that focus and revert to our subconscious behaviors. (Just think back to your mindset in November and December of 2018 and I’m sure you’ll identify with some reactionary thinking).

While there are countless behavioral finance biases that impact all investors , today we’ll focus on one that has come up in many conversations as of late - anchoring


Anchoring refers to our tendency to attach (or anchor) our thoughts to a reference point - even if that reference point may have no logical relevance to the decision at hand. Here are just a few examples of anchoring - and some suggestions on how to overcome it in and “set sail” from here on out

1.) High-water mark

I’m guessing you may know this number - the all-time high balance you observed for your investment portfolio. Perhaps you arrived at that amount in January 2018 or in early October 2018 or in recent weeks. Regardless of the exact date, you likely know the number and have evaluated your portfolio’s performance against that mark ever since. You may find yourself thinking things such as: “if I could only get back to that value” or “when I get back to that value I’ll (fill in the blank),” or “had I known what was coming, I would have moved to cash when I hit that level”

If you step back, what does that value really represent in your investing journey? Not much - it’s simply a reference point. One of many reference points during a multi-decade journey. Had markets kept advancing past that point would you be focused on that value? Likely not. Would you really have altered your whole investment approach when you reached that number (without any other information)? Again, likely not. Is it logical to compare your performance to that number? Again, no.

That number only has relevance because you have anchored to it. There’s no going back - we are sailing forward and can’t go back. Consider focusing on more relevant comparisons such as the return of your blended investment benchmark over the comparable time period and your unique return goals. How are you doing in comparison to those metrics? Pay attention to relevant data points and you may just pass by that previous anchor

2. Evaluating individual stocks

Anchoring is especially prevalent in evaluating individual stocks, especially when it comes to selling vs holding (or adding to) stocks that have fallen in value. As an example, if we pay $50 for XYZ company and it falls to $30, we become very focused on that $50 price point (we anchor to it). “I’ll sell it when it gets back to $50” or “I’ll just hold on until it gets back to break even - but I’m not buying more” We’ve anchored our assessment of that company’s fair value to the price we paid for the stock, which truly is not all that relevant.

That price you paid is what the market was willing to sell it to you for on that given day. After you buy it, that price isn’t all that relevant any longer. Instead, you should continue to do your homework and independent research and determine what you believe to be the fair value of the company (and its underlying stock). If the stock remains below the fair value by a margin that is more attractive than other alternatives, it may be worth holding - on even adding more. If the stock has exceeded your fair value estimate, perhaps it’s time to move on and find another under-valued opportunity. But to anchor to the price you paid (or even to the current trading price) won’t help you make an informed decision.

Stock markets may be the only marketplace in the world where consumers don’t like to buy as prices come down. However, with the right reference points in your sight-line (ie: your estimates of fair value, independent of price you paid or current trading prices), you will have a shopping list ready to go during the next pullback

3. Market estimates

Anchoring also comes into play in our forecasting of general market performance. Investors tend to anchor on the current level of an index as their reference point and using that, make estimates that tend to be very close to the current level. As the Dow Jones approached 27,000 in early October 2018, estimates were clustered around 28,000 - or even 30,000. And when markets corrected and started to fall, estimates were quickly revised downward, in lockstep with the actual moves in the indexes themselves.

Instead of anchoring to a current index level in determining how to allocate your capital, consider evaluating the current state of the economy and more importantly, the rate and direction of change of those elements. Where do we stand in terms of growth, inflation, interest rates, economic activity, and labor force? And are these components getting better or worse? Those are relevant data points in determining when and how to allocate your capital to various asset classes

Anchoring is an instinctual human behavior - one that we have all been guilty of from time to time. Remaining aware of these examples - and the tactics to pull up your anchors in future - will make you an even better investor going forward.

Let’s sail forward and leave those anchors behind!


Ways to overcome anchoring

*Carefully evaluate your refernece point - is it the rigth metric

*Independent analysis

*Compare to alternatives at the present moment - not the asset in the past

View from the Chair: Windermere's Market Perspectives (February 2019)

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There were few investors who were sorry to see 2018 go. Market movements in October thru December brought returns for the year negative and erased most annual gains, all while worrying investors with significant daily movements and seemingly endless selling pressure.

Why did these sharp downward moves occur? Markets are complex and there is no way to fully unpack material moves (in either direction). Keep in mind what markets are and how they are priced: they are a collection of securities that represent a claim to a future stream of cash flows - and they are valued based upon what the present value of those future cash flows is believed to be at any point in time.

It is our belief markets were pricing in worst case scenarios on four major items at the end of 2018 (US growth, interest rates, trade, and political instability (the shutdown)) - the combination of which brought down the anticipated future cash flows from investments (and therefore the prices and aggregate market values). Add to that thin trading volumes during the holidays and year-end tax selling, and it was a dire situation for almost all markets

What’s happened in January? An improvement was seen on all four fronts, earnings continued to show strength and growth, and buyers returns - all of which has brought prices back up and returns materially positive for the month as shown below

Where will we go from here? As always, it’s impossible to predict the market’s next move but one thing is for sure: volatility will present itself time again and again (especially given where we are in the economic cycle). Here are a few strategies to keep in mind to help you stay calm and more importantly, stay invested should the material swings we saw in December reappear any time soon:

1.) Widen your lens - Investing is not meant to be a short-term journey. And odds are that you have been investing for several years at this point. While it’s easy to look at your returns from any one quarter or month, expand the time frame. Your return over a period of years or even decades are far more relevant. So if you must evaluate your returns in volatile periods, be sure to consider a longer time frame

2.) Revisit your goals - All investing should be done with intention. You should have a destination in mind - whether it be a targeted annual return or a needed withdrawal amount to fund retirement. When volatility arrives, evaluate the immediate (and known) impact on your goals. In all likelihood, the ability to meet your goals won’t be harmed by a short-term event and knowing that may help lessen your desire to react as well as your fears

3.) Stay in your Lane - People talk about all sort of things - investments included. You’re likely only to hear about their successes - the stock they owned that has doubled, their incredible gains, their unique investment opportunity. While other people’s wealth journeys may be interesting, they are not relevant to you. You don’t know the context, completeness, or accuracy of what they are telling you. Your journey and your facts are what matters. Just smile and acknowledge the conversation - and then return to your own lane

4.) Talk it out - Oftentimes, our own inner dialogue can be our worst enemy. If you have fears or questions when markets move swiftly, talk it out. Reach out to your financial advisor (you know where to find us) and walk thru everything you are thinking and feeling. A discussion and an empathetic ear may be just what you need

5.) Resist the urge to act- Time in the market is more important than timing the market. As illustrated by December and January, the sharpest down moves in the market tend to be followed by the sharpest moves up - and both can arrive when you least expect them to. The exact timing cannot be predicted and as a result, staying in the market and sticking to your long term target allocation is essential. If you feel the urge to act, do your best to stop yourself and stay the course

6.) Consider buying low - Market sell-offs many times present the best buying opportunities but unlike most other shopping experiences, investors hesitate to buy things on sale (for fear values could decline further). However, if you have a few stocks on a wish list and have done the work to determine the price you would be willing to pay for them, a sell-off may give you that chance. As Warren Buffett wisely says, “be greedy when others are fearful”

We know volatility is upsetting and hard to withstand. Try these strategies out next time the market moves sharply and hopefully they will help calm your nerves. We never said investing would be easy, but we certainly believe that it is worth it

Invest on,