Updated: Feb 27
The markets have found themselves in a near free-fall over the past week (after a nearly uninterrupted rise that began last October). The “reasons” for the sharp selloff are most likely due to panic about the spreading of coronavirus and fears that it will bring the global economy to a complete standstill, exacerbated by the political climate where self-proclaimed Democratic Socialist Bernie Sanders currently appears to be the probable nominee for the Democrats in the upcoming presidential election. As such, even safe-haven sectors like defense and healthcare have come under significant selling pressure as the market shoots first and asks questions later.
I have observed over the years that when the market comes unglued, correlation rises near 1 (effectively meaning all securities trade down indiscriminately as investors sell en masse. This phenomenon is perhaps made worse by the rise of passive investing and indexing which results in panicked investors selling the entire market with utter disregard for the merits of individual securities).
With the markets down a nauseating near -8% over the last 3 trading days, I received a timely email from a friend in the business that reminded me of a story from my youth (a story I never thought I’d recount in a blog post about markets 25 years later!). My friend’s message was this:
“Have you ever gotten seasick? What were you advised to do? Look out towards the horizon, right? Doing so doesn’t instantly cure you but it does help you feel better. Investors need to do the same thing, look out towards the distant future and ignore short-term market chop. Clients who can’t or won’t do that get predictably bad results. It is fascinating that they don’t see the specific bad news coming (after the event, they invariably claim to have foreseen some concern) but somehow think they will know when to get back in.”
Good advice and a reminder for investors to maintain perspective and long-term focus.
And now the story…
In March of 1995 (25 years ago), my family took a trip to Europe for Spring Break (specifically London and Paris). This was the first time I had traveled internationally and there was much excitement to go to Paris where my sister and I would have an opportunity to test our French speaking in the real world.
After our first 3 days in London we had reservations to take a 75 mile train ride to Dover where we would then board a large catamaran (seating ~200 people) to cross the English Channel and arrive in Calais, France shortly thereafter. Under “normal circumstances” this would’ve been a short and pleasant 45 minute boat ride. Note that this trip was in the early 90's and the Chunnel (tunnel under the English Channel) was not yet a viable option.
When we woke up the morning we were scheduled to depart for France, something was clearly wrong. My father quickly informed us that Victoria Station had been bombed by the Irish Republican Army and that ALL train stations in London were now closed. Suddenly we had a huge wrench thrown into our plans and were not sure how we would get to Dover in time to make our boat reservation. In his infinite wisdom, Dad was able to find a willing cab driver (Bob) who said he would drive us the 75 miles in an English taxi for a mere £90 (about a $250 cab ride before tip at the time). Bob said he could get us to Dover in time to make the trip but we had to act quickly as time was not on our side. We took Bob up on his offer and took an enjoyable ride through the English countryside, arriving at the white cliffs of Dover just in time to board the catamaran.
However, when we got to Dover we learned 2 things: First, while we were enjoying our expensive cab ride through England, all of the train stations in London had re-opened so our expensive emergency cab ride now looked like a costly mistake (had we waited just a bit longer we would have had minimal issues getting to Dover). Second, the weather in Dover was HORRIBLE. Heavy rain had moved in and the boat (assuming it could even depart) would be fighting against 30 knot winds and 10+ foot seas, hardly ideal! But the Griswalds...err the Bockels were on a mission and we were not to be deterred (there were really no other options but to push forward!)
When the boat finally departed from Dover it took less than 5 minutes for things to go south. The seas were so choppy it seemed like we wouldn’t be able to get 50 feet from the dock (we were going up and down faster than we were going forward) but the captain was determined to push forward. The first few minutes of big ups and downs in the boat were like an amusement park ride. However after a few minutes it was clear we were NOT at Eurodisney. The moans and groans from other passengers became increasingly audible with each swoon and before I knew it a man in the aisle next to me was lying on the floor, face down, praying for help. And by praying I mean he was praying into a barf bag. A cheerful atmosphere quickly turned into full-blown misery and the vomiting was contagious with loud heaving noises now coming from everywhere on the boat.
About 10 minutes later my sister finally broke down and joined the growing list of passengers offering up their breakfast as sacrifice. Then my mom lost it. At this point (maybe 30 minutes into our supposed 45 minute trip) my dad (a seasoned veteran and owner of a sailboat earlier in his life) suggested he and I walk around the boat to “get our sea legs”. We carefully walked to the back of the boat and I quickly realized that I was about to become part of the majority. My dad handed me a barf bag and I joined the chorus (or "calling Earl" as he referred to it). My smile had turned into defeated tears as we walked back to our seats where things were still getting worse. A quick look around the boat revealed the boat staff literally walking around with large, black trash bags collecting pre-packaged stomach contents.
A couple of times our captain would come on the public address system to update us on our progress noting that, due to the weather, our boat trip would take slightly longer than normal. Some more moaning and groaning would ensue at the collective realization that there was no end in sight to our shared misery. Finally the captain came on again and leveled with us: The trip would take at least 2 hours and we would not even be arriving in Calais. Nope—due to the weather we would be arriving 20 MILES west of our intended destination in the port city of Boulogne, further adding to the length of our trip and increasing the uncertainty that we would make it to Paris in reasonable time.
At this point my dad, in his attempt to make light of the situation, broke into an unforgettable rendition of The Love Boat theme song. Sure, it was funny but I assure you nobody was laughing (oh how we laugh now!)
But we did finally arrive in Boulogne after a seemingly interminable ride. I had never been so happy to stand on solid ground. The feeling of stability was a near instant cure to the motion sickness that seemed like it would never end only moments earlier. We caught a train and arrived in Paris not much later (where other adventures ensued) and enjoyed an amazing second half of our vacation though the memory of that boat ride will always linger.
Those 2+ hours on the boat ride from hell felt like a lifetime (even though it was a mere 2 hours of discomfort). Periods of market dislocation and volatility can feel similarly with days feeling like weeks, compelling scared and short-sighted investors to lose their nerve and bail out. However, with hindsight and perspective, market swoons are usually blips on the radar and provide opportunities that often go overlooked. Oddly, the capital markets represent one of the only places I know of where, when assets go on a fire sale, very few people seem to want to buy.
I’ll never understand how my dad didn’t break on that boat ride but he was unflappable (he was probably one of about 3 people on the entire boat (including the staff) that truly had an iron stomach. I’m pretty sure his past experience and knowledge of focusing on the horizon was a big part of it, though.
This too shall pass. Try not to focus on all of the people puking around you. Maintain your long-term perspective with an eye on the horizon.