May 2011
The Hecuba Problem
In Hamlet, Shakespeare memorably portrays the title
character’s frustration at his inability to motivate himself to
avenge his father’s murder. Despairing at his passivity, he is
anguished to witness (in Act II, Scene 2) the effectiveness of
an actor describing the grief of the Trojan queen Hecuba at the
death of her husband. Hamlet marvels at this ability to
achieve sudden, extreme emotion and asks, “What’s Hecuba
to him, or he to Hecuba?”
Most of us face the opposite of Hamlet’s problem – our emotions are all too easily
engaged. Think about sports fans, leaving behind their cares to immerse themselves in
a community of like-minded fans, where everything is clear-cut – your team is
virtuous, the other team is evil and there is always a winner and a loser. It is fun to be
passionate about something, even (or perhaps especially) something unrelated to your
life. This is neither new nor just about sports -- more than two millennia before the
Portland Trailblazers won the NBA championship, Aristotle pointed out the beneficial
cathartic effect on the audience of tragic drama, with viewers able to work through
issues vicariously rather than acting them out in their real lives. Unfortunately, in our
profession such emotional projection is usually harmful.
What is Deepwater Horizon to you, or you to Deepwater Horizon? If that name strikes
only a faint recollection, you are proving our point. A year ago, the world was agog at
the continuous spewing of oil from an underground pipe in the Gulf of Mexico (at
least that is what they told us on TV when showing the video – for all we know, that
pipe could have been a quarter inch across in somebody’s aquarium). Based in part
upon the continuous spewing of coverage in the media, the U.S. stock market fell
about 16 percent because of the supposed parade of horribles that would follow. Now,
we know that the spill really was a terrible thing, but for most people it seems only a
distant memory. Investors that panicked and sold in that downturn last July missed the
subsequent 30 percent-plus rise in the U.S. stock market.
TACTICAL GLOBAL INDEPENDENT
What is Gadhafi to you, or you to Gadhafi? In February, a rebel uprising in Libya, and the U.S.
involvement in aiding the rebels, rocked the financial markets day to day. What is the Fukushima
Daiichi complex to you, or you to the Fukushima Daiichi complex? In March, the financial markets
reeled as we learned about the aftermath of a Japanese earthquake and tsunami, including the
possible meltdown of a nuclear power plant. Just a few months later, the Libyan situation is at best
below the fold in the newspaper and you have to search to get any update on the Japanese power
plant. What seemed so important three or four months ago no longer seems to engage us. Now, we
know that a nuclear plant meltdown would be bad, and we hope the rebels topple Gadhafi as peace
and prosperity reign across the Middle East, but the length of time required to work through those
specific problems appears to have exceeded the short attention span of investors. The markets now
march to new events, unrelated to those that occupied everyone not long ago.
What is Obama (or the House of Representatives) to you, or you to
Obama (or the House of Representatives)? People tell us all the
time that the country is going down the drain due to those idiots in
Washington D.C. running the country – they just disagree which
idiots are to blame. Nobody ever seems to want to buy stocks
‐‐ Hamlet, Act II, Scene 2 because of election results. Since investor sentiment is a contrary
indicator (too many cheerful people are bad news for future market
movement), we are encouraged that both sides of the political spectrum are similarly depressed, each
side blaming the other for our disagreeable future and the horrors that lie just around the next corner.
Now, we know that enlightened government is important, but the place to take out your political
frustrations is at the ballot box, not in your portfolio. The market has managed to produce both good
and bad returns under administrations and majorities in Congress of both parties; the market gods do
not have a “D” or “R” after their names.
“There is nothing either
good or bad, but thinking
makes it so.”
What is Apple to you, or you to Apple? We use Apple as a proxy for any stock – Apple just seems
appropriate because it recently has been a “religion” stock. It is not uncommon for investors to fall
in love with story stocks – in fact, stocks are sold to investors by the use of stories, the easiest way to
engage emotions. We hate to break it to you, but Apple does not know you own it, and it sure does
not know at what price you bought it. Your love for any investment is unrequited.
What seems critical in the emotions of the moment is likely to be insignificant over your investment
time horizon. Whatever you talk about today at the water cooler may obsess you, but you almost
certainly will have forgotten the subject in years to come when you are using the money you have
saved and invested. What seems urgent is seldom important; what is important is seldom urgent.
Until we have shuffled off this mortal coil, we will be subject to waves of panic, anger, despair,
greed, envy, hatred of the Los Angeles Lakers and other passions. Hamlet finally was able to
provoke himself to engage his emotions, but it is worth remembering the result was a lot of death on
the stage. In investing, spur yourself to action for critically important (but not necessarily urgent)
long-run decisions, but guard against any ephemeral fervor resulting from today’s paper or tonight’s
newscast.
SIGMA