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I cannot remember a time when we received more calls from clients looking for wealth managment advice, worried, about the economy and markets. It is understandable based upon the chaos perpetuated by the media. I think CNBC, Wall Street writers, politicians and others in the media cause unnecessary worry and apprehension in their zeal to forecast recessions and recoveries. However, never do we hear the truth, that recessions are normal. Because normal doesn’t sell. It doesn’t increase viewers on CNBC, readers of the Wall Street Journal, buyers of the latest financial book, or votes for a candidate. The fact is economies slow down, and speed up. Recessions are normal cycles just like the four seasons, and the ebb and flow of the tides. Obviously there are no headlines in that.
According to wikipedia:
The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods of relative stagnation or decline (contraction or recession).[1]
These fluctuations are often measured using the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern.
I firmly believe that recessions are not only necessary cyclical events, but provide important opportunities for investment and economic adjustment.Why? Here is the long explanation. First, of course, we will need an assumption set:
1. Wall Street firms will sell to anybody.
2. Rather than buying what is practical or right using logical analysis, some people will buy due to “recency effect”.
3. Due to “endowment behavior” some people will not want to sell anything, even speculatively-valued investments, even though it’s in their best interest.
4. Fear causes irrationality.
5. Fear motivates and sells.
6. Greed motivates and sells.
7. Some people don’t take the time to investigate before they invest.
8. Some people are complacent; others are not very patient.
Take those assumptions and add to the mix this scenario. In the late 1990s/early 2000s, banks, Wall Street, internet companies, and real estate all went up like wildfire, and people made a ton of money. Then somebody noticed that there were more internet companies than people on our planet.
Then the event of September 11 caused enough fear for people to sell hotel stocks, airlines, even Disney, among others, as if no one would ever leave their safe home ever again for a business meeting or to take their kids to see Mickey. But some people (like me) were enticed by the bargains and took advantage of five-star resorts at Motel 6 prices. So, regardless of the markets and the fear, economic activity happened. People left their homes, bought stuff, went to work, and the economy recovered.
I recently looked up the resort we visited following September 11, and its rates are now four times higher. The point is, enough of us said, “I’m not going to let fear guide me,” so we ventured out, bought food, renewed our subscriptions, went to dinner and said “yes” to Disneyland at prices so low they overcame our fear.
There is a similar effect with investment. It is a fact that investments tend to go down, not because of lots of sellers, but because of few buyers.
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