HOFFMAN,
WHITE & KAELBER FINANCIAL SERVICES, LLC
Investment
managers & WEALTH Advisors
August 15, 2006
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How Fear Impacts Your Wealth
Why does
the average investor buy high and sell low (the exact opposite of what they
should be doing)? What makes them invest
when the market has already experienced a significant run up? And, what makes these same people sell after
a significant market correction has already occurred? Conversely, why do others feel compelled to
stay with a poor investment rather than change course? It isn’t so that they deliberately choose to lose
money. Rather we might explain it as
“herd mentality,” absence of enough information, or a lack of
comprehension. The real answer lies
deeper than that. It lies in our
emotions and their power to overwhelm our reason while driving us to poor
decisions.
Fear and
greed are two emotions strongly coloring the decisions of many investors. Whether an event produces fear is highly
dependent upon our individual circumstances.
Changes in the Consumer Price Index (CPI) and news of a rising inflation
rate can cause fear in those living on fixed incomes. Corrections in the markets can cause fear as
we watch others sell and see the value in our portfolios diminish. When fear becomes the dominant force driving
our decisions we tend to make bad ones.
We sell when we shouldn’t. We sit
on the sidelines too long. We act too
quickly after considering too little information.
Where are
you vulnerable? How much money have you
lost as a result of fear based decisions?
I know one gentleman who is sticking with a failing strategy because to
change course would mean that he would “realize” his losses over the past year
and a half. Instead, he’s staying put
and waiting for those losses to be recouped before he changes strategies. In this way, he believes, that he really
won’t have lost that money. He’s afraid
to face reality. How does fear affect
you? Most people don’t really think
about it, as if by not noticing it really isn’t a factor in their
thinking. Many people don’t like to
think of themselves as being driven by their fears. Do you?
On the
other hand, if we are aware of our fears and their affect upon us we can deal
with them. We can stop reacting reflexively
and regain control.
As readers of our newsletter well know, wealth management is
the ultimate goal of all that we do at Hoffman, White and Kaelber. Yes, we promote our services; yet, you will
find that we always seek to present thought provoking topics that are relevant
to our wide audience.
In this
newsletter we will take a quick look at the nature of fear and then consider
some common examples of situations that will allow us to identify the steps for
dealing with any of our fears. As you
might guess, this article is the astute work of our Dr. Dan Elash and we think
you’ll find his view quite helpful. Once
you’ve read his enlightening piece, please be sure to spend some time looking
over our market comment and performance for the month past. It will be well worth the investment.
How Does Fear Work?
Webster’s
New World Dictionary defines fear as “a feeling of anxiety or agitation caused
by the presence or nearness of danger, evil, pain, etc.” This nearness can be in terms of physical
distance or the psychologically proximate presence of threat. While any number of dangers or threats may be
real, they are perceived through our own perspectives and then magnified or
diminished by our assessment of how well our resources can protect us.
Fear is the
mind’s reaction to a perceived danger or threat of harm. There are two elements required for us to
experience fear. First, we anticipate
the possibility of consequences that we don’t want to face. Second, we believe that the situation we face
has the ability to overwhelm our abilities to defend against them. When we face challenges we feel we can handle
we are not afraid. We even seek out
opportunities to be scared when we believe, deep down, that there is no real
imminent threat. Amusement park rides,
scary movies, and page-turner books are examples. On the other hand, when we can’t imagine how
to cope with perceived threats we can become, defensive, avoidant, or even
frozen into immobility. The difference
all lies in our realistic assessment of our capabilities to cope with the
danger or threat.
Fear as a Wise Advisor
The secret
to beating a threat lies in our willingness to face it, survive it, and come
out the other side stronger than before.
This willingness requires a plan.
The plan can entail gaining new skills, competencies, and/or
resources. This may involve learning new
things, getting additional help, or adding protections against the things we
fear. The plan might also involve a
strategy that restores our confidence in our capacity to handle the potential
threat with our current resources, by acting differently in the face of the
threatening situation. Fear is the
body’s self-protective signal that we need to act. It fosters growth, change and
adaptability. Fear is your friend if you
use it as a wise advisor. It is harmful
when it causes us to panic, to act irrationally, or to become frozen in
despair. Therefore fear provides us with
a choice. When we have a choice, we have
options. Options lead to solutions. We can always control what we choose to do
about what we feel.
A second
general principal for defeating fears rests in our mindsets. When some people face a threat they spend
their mental energy focusing on the fear.
They imagine the worst case scenario and replay those images over and
over again in their minds. In a very
real sense, they put their mental energy into rehearsing failure. They anticipate it, fill their minds with it,
and become overwhelmed by it. This is
what leads to poor decisions and ultimately failure. Winners, on the other hand, focus on what to
do in order to resolve the fear. They
create a plan. They envision themselves
being successful, and they refuse to dwell on the things that are beyond their
control. In essence, they mentally
rehearse success until they are ready to take action to resolve the situation
that frightened them.
Where you
put your mind and the choices you entertain and then execute will create a
winning attitude that builds you up rather than destroying you from within.
There are
two scenarios that I want to consider as working examples for how you can beat
fear. People with significant wealth
often battle one or more of these fears.
The steps to defeat these fears work against any fear, and so the
lessons learned here can help you to become not only a happier person, but a
more successful investor and a wiser steward of your personal wealth.
The Fear That People Want Me Only
For My Money
The situation:
Many wealthy people live very lonely existences because they are
consumed by the fear that others only relate to them because they want
something. What is so insidious about
this thought is the reality that everyone relates to everyone because they want
something. That something can be
companionship, friendship, wisdom, affection, sex, opportunity, validation and
on and on, but it is always something and often more than one thing. This isn’t bad. It is simply human nature. You want many of those same things from the
people with whom you associate as well.
Successful, fulfilling relationships are always an exchange of
value. The best friendships are often
based on one person needing what another can more easily give and vice
versa.
If,
however, you define yourself by your money, it can be very difficult to believe
that others can define you as anything else.
When you feed this fear everyone can become suspect. We tend to see what we are looking for if we
look long and hard enough, because we can always ascribe motives to people
whether they are accurate or not. You
begin to create a reality by what you expect.
Your fears become self-fulfilling prophecies. You think, “That boy only wants my daughter
so that he can get to my money.” You
think as if your daughter could have no other attractive traits. Or you decide, “He’s only acting like my
friend so that he can leech off of me.”
Thinking like that often leads you to treat people badly so that the
only ones who come around are those who are willing to suck up to you for what
they can get. Viola, your fears are
proven! You become resigned to even
greater loneliness or you give in and buy your friends.
An effective response: There are choices. In your choices lies your freedom. First, where do you put your mind? Instead of filling it with fear, take a
realistically skeptical stance. (The key
word here is realistically.) Give people
some benefit of the doubt. Do they offer
you something that you want or need?
What assumptions and presumptions do they make? What do they offer? What do they do when you say, “no?” Don’t prejudge but let relationships
unfold. Remember, whether you are poor
or rich, all relationships are about trading what I have to share for what you
have to share. Make sure that you are
offering something other than your wealth to the people in your life. Relationships are built over time. Gain confidence in your own likeability. Share the interests and hobbies that intrigue
you with like-minded others. See
yourself as more than your money. Don’t
offer money or things only to become cynical when others accept. These choices are yours. Don’t abandon them.
Your
protection always lies in your ability to stand up for yourself, to say “no”
when you are asked for something you don’t want to give. True friendships survive occasional
“nos.” Give the people who intrigue you
the opportunity to earn your trust and see what they do. We need friends and companionship. People are social creatures. Just like in strategic arms limitation
negotiations, the solution lies in the adage, “trust but verify.”
In addition
to learning to say “no,” develop safeguards.
Contractual agreements, trusts, wills and other instruments can be drawn
up to protect you from momentary lapses in vigilance or judgment. Get advice and create a plan that adds to
your overall protection against that which you fear. Evolve your plan as the conditions of your
life and your circumstances change. Make
a plan. Work the plan. Let go of the fear.
Fear That Money Will Corrupt Your
Children
The situation:
At HWKFS we occasionally deal with people who want to give away a
lifetime’s accumulated wealth because they are afraid it will corrupt their
children. This is a realistic fear. Money can do that. We all know of cases where it has happened. And, there is nothing wrong with charitable
giving. But giving your money away based
upon fear is an extreme and possibly unnecessary option.
An effective response: The alternative is for you to use your money to build the
capabilities, judgment and wisdom in your children so that they are prepared to
handle money responsibly. Start
early. Start by not overly indulging
your children while you are in control of your money. Don’t substitute things and money for your
time and attention. Make them earn what
they want through their own efforts.
Recognize that being overly indulgent is not a loving thing to do.
Let me
share a story about a young CEO that I know.
He has two boys in high school who wanted to design and sell t-shirts
and they wanted dad to give them the money to start their venture. After some coaching, dad decided to act as an
angel investor. He had the boys develop
a business plan (he helped them but didn’t do it for them). They had to research the market and make a
case that their business idea was viable.
When he was convinced by their seriousness and effort, he lent them some
but not all of the money that they needed.
They had to earn the rest. Then
he sat on the board with them and held them accountable for their decisions (he
advised, but did not tell them what to do).
He made them repay the investment out of their profits. He ensured that they came away with wisdom
and experience worth more than the money they generated. This summer, the older of the two chose to go
to business camp on his summer vacation.
This particular
dad is working today to fan the flames of passion and ambition by using the
wealth that he has to teach valuable life lessons that are now theirs
forever. It took his time and effort to
create this experience with his sons. He
used the same leadership skills that serve him well at work to pass on these
lessons. Foremost, in what he did, he started
out with the intention to use this opportunity to educate his boys. He put his mind in the right place. He worked a plan. He rehearsed success.
It is never
too late to begin to foster competent behavior in your children, but the longer
you wait, the more difficult the task becomes.
Many parents mistakenly think they can’t adequately teach money
competencies and so they don’t try.
Common sense can go a long way in this effort. I’ll share a mantra with you that I use in
coaching corporate executives around
In Conclusion
Fear does
not have to be a constant companion. It
can be, but it doesn’t have to be. Get
your mind in the right place. Identify
your options. Build your resources. Create a plan. Make good choices. Anticipate and rehearse success. Work the plan. Let your fears trigger your growth into a
better person, a better investor, and a better steward of your wealth.
Hoffman, White & Kaelber Financial Services Investment
Performance Update
Given where most major market indices are right now, it
isn’t hard to believe that we are in a “side-ways” market right now – with lots
of volatility in between. Yet, it is
precisely the increased volatility that can obscure your view. It also doesn’t help that the more visible
market professionals – those that we regularly see on TV and in the news –
don’t seem to agree, with any consistency, on the direction of the US economy
and how that may impact other economies around the world. So, why the confusion? I think that changing monetary policy is the
key, yet there are other issues contributing to the increased levels of
uncertainty rotating through the markets – in the form of volatility. The biggest questions are: Is the
Here’s my tally: The housing market is slowing, the impacts
of higher short-term interest rates have yet to be felt by the consumer, high
oil prices remain a continuing drain, the yield curve is inverted, failed trade
talks are fanning protectionism, and inflation remains a threat. On the other hand, second quarter corporate
earnings came in strongly positive, corporations are flush with cash and the
latest retail sales report suggests that the consumer is not slowing. We think the markets are vulnerable until
there is less confusion.
Our taxable accounts are positioned with a short bias at
present and our plan accounts are approximately 20% to 25% long our best equity
ideas with the balance in cash and high yielding floating rate notes.
For the month ended July 31, 2006, our
one-month performance is down 1.99%, our one-year return is up 6.83%, our
three-year return is up 6.46% and our average annualized return since inception
is up 8.16%. Despite a continuation of significantly
increased market volatiity, our since inception risk measures remain very
conservative at +/- 5.92% (+/- 6.28% and +/- 5.91% for one-year and three-year
measures, respectively) and our Sharpe Ratio (reward for risk taken), while
lower, on a comparative basis, is still very respectable at 0.97 (0.39 and 0.65
for the last 12 and 36 month periods, respectively). For more performance
information, please see our web site for details.
Is a comfortable retirement or preservation of wealth important to
you?
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Research us on the web at www.hwkfs.com