Investment lessons from the 1983 Diana Ross concert riot

investment-lessons

Investment lessons from the 1983 Diana Ross concert riot

Volatility returned to the US stock market in November. In the first week of the months, stocks surged 3.6% on the back of the first decent jobs report since May. Stocks fell 6 of the next 7 day over concerns about a weakening US dollar, inflation worries in China and concerns about the banking system of Ireland (Ireland? Seriously?) Just as bears began crowing about the indices "breaking through support levels" stocks regained composure and are now up 0.6% for the month, which is about a "normal" month's gain. In principal, markets are "efficient." In practice, the market seems ever more "inefficient," overshooting and undershooting fair value in ever shorter time frames.

We've been trying to understand what makes the market psychology schizophrenic, and we remember, of all things, the Diana Ross concert in Central Park in July 1983. Over 500,000 people gathered on the Great Lawn for an annual free concert (Simon & Garfunkel, the Beach Boys, the B-52's were acts in other years.) About 15 minutes into the performance, a terrible thunderstorm blew in, the sky turned black, lightning split the sky and over 2 ½' of rain fell in the next 30 minutes, which quickly turned the meadow into a swamp.

This photo shows Diana Ross leaning into the storm winds, which gusted to 50MPH. On YouTube, we can relive 6 minutes of the storm overwhelming the performance  with Diana Ross trying to calm the crowd and direct concert-goers out of the park.

What is not obvious in the video is that thousands of people began panicking and surging up against the barriers that had been designed to corral the audience into sections. People fell and were trampled on, parents became separated from children, and the 800 or so police officers on hand were unable to maintain order. In the melee, packs of roving teens mugged concert-goers of purses and wallets; hundreds were injured. A member of our investment team remembers getting his back up against a tree and waiting for the crowd to clear so that he wouldn't be harmed. Within 20 minutes the stampede was over, luckily without fatalities. Overnight, 500 volunteers worked to clear the venue of soaked and abandoned clothing, picnic baskets, and shoes. The following night, Diana Ross repeated the concert without a hitch.

Interesting story, of course, but what does that have to do with stock investing in 2010? It seems to us that investors are acting ever more like panicked teens at a rock concert. Every news event is treated as a storm, amplified by the breathless commentary on CNBC and Fox Business. Investors cough up good securities at fire sale prices, only to see the prices rally back as calm returns. In other words, they "buy high, and sell low." What's worse, there are plenty of predatory investors out there - hedge funds that manipulate ETF's, high frequency firms that scalp stock prices - to fill the role of the purse snatchers, with the regulators still woefully undermanned to police markets.

The economic reality is not so dire. We worry more about deflation than inflation, but at least for now the cost of goods and services doesn't appear to be moving in either direction. Banks are cautiously increasing loans to small business. The American consumer is aggressively deleveraging - net consumer loans, which includes, housing, car loans and credit cards, are falling for the first time in over 30 years. Unemployment in the US remains high, but for those who do have jobs, the expectation of being laid off is diminishing. Indeed, many US workers are on overtime as corporations are unwilling to add employees while so little is known about the tax code and healthcare regulations in 2011. Consumer confidence is trending higher, and therefore consumer spending is trending higher. The process of recovery is much slower compared to previous recessions, but should still result in plus 2% GDP growth in 2011. Corporate earnings continue to surprise to the upside with strong earnings and revenue growth, and even better, expanding margins.

So what do we make of the last three years? As early as summer 2007, financial markets darkened as two Bear Sterns hedge funds went under. Even so, the full force of the storm hit only with the Lehman bankruptcy in September 2008, and hit hard. Given a choice of running with the crowd, or backing up against a tree, we chose the latter course by sticking with real companies with real prospects, real earnings and a real chance of outperforming the S&P 500. We work primarily with individuals and families. As we look over our portfolios three years later, we see that, net of withdrawals, half are at an all-time high, and half will be at an all-time high within a year. Among the third or so of clients that are relying on their portfolios to support their retirement, we distribute a monthly "allowance" set at 4-6% of their pre-crisis assets from bonds and bond funds. As stocks prices recover, we're reloading the bonds. Through the entire crisis, we never had to cut anyone's "allowance." If that's not a measure of the success of our strategy, we don't know what is. The storm passed by April 2009, but so many who were panicked out of their stocks in March 2009 (and never got back in) missed an astonishing 69% gain over the last 18 months.

Strategy and year end tax planning

We have not seen anything in recent economic reports to change our stock allocation strategy. With six weeks remaining in the year, we will wrap up rebalancing accounts and taking tax losses.

By mid-December, clients should contact us if they want to:

  1. Do a partial or total ROTH conversion of IRA assets. Generally this conversion benefits those clients who are 35-50 years old, or who would like to postpone drawing down IRA assets past the 70 ½ cutoff for normal required minimum distributions.
     
  2. Make gifts of appreciated securities to fulfill charitable pledges or to fund a Donor Advised Fund.
     
  3. Make federal and state tax free (up to $13,000/person) gifts of assets.
     
  4. Want to take advantage of the $1 million lifetime gift exemption.

We will do our best to keep our clients apprised of changing estate and tax laws, which at this point in time are completely in limbo.