Another test of resolve

It never ceases to amaze me how thoroughly markets test the resolve of those who participate in them. It really doesn't matter which market we are talking about: stocks, bonds, commodities, foreign exchange. Even real estate. After all, those who thought real estate was a "sure bet", are certainly having their resolve tested right now. By the number of for sale signs I see going up in my town, I would say that many are flunking the test.

The stock market is presenting us with a similar test. In the past 9 days, the broad market averages have dropped 6.3%. Year-to-date, the S&P 500 is down almost 12%. I am very proud to report that our clients are passing this test with flying colors and you are to be commended. I have had the opportunity to speak with most of you by now and almost to a person, you have been steady in the face of the maelstrom and I have full confidence that your steadiness will be handsomely rewarded. Of course, the rewards for holding won't be immediate. I believe we will pass through more challenges before the current credit crisis is resolved.

Last fall I attended a conference where Steve Wynn, the Las Vegas casino mogul, spoke to a packed house. He said the key to running a successful casino is understanding that human beings crave instant gratification. Steve has built a huge gaming empire based on satisfying that human longing. I think it is telling that the profits of his empire are based on the losses of his patrons. Seeking instant gratification is rarely the path to financial success.

Which brings me back to my discussion of the current market environment. This human craving for instant gratification usually leads investors to disastrous outcomes. When it seems like the market is coming unglued, the urge to cut and run--to seek instant relief--can be almost overwhelming. And, trust me, in the moment of relief, it feels very good. But that sense of relief can be very beguiling. Like that girl mother always warned you about, it will lead you wrong--causing you to sell when you should be buying (or at least holding on.) Even worse, it sets you up for an even thornier dilemma: when do you get back in? The anxiety around this second dilemma can be just as perplexing as the original problem. Seeking relief from that anxiety will almost always lead you to buy at the worst possible moment.

For me, the better path in most situations is to put in place a sound strategy, implement that strategy with high quality investments and hold steady.