Market Realities

The selling wave in the stock market has swept all before it. Like the tsunami that swept Malaysia a few years back, it has left destruction in its wake. To the extent that it influences the close US Presidential election, its effect will be large but uncertain.

But those who have lived through it will probably never view the stock market the same. The inevitability of positive stock market returns shown us by internet based retirement calculators and smooth financial planners is gone from our minds. Instead we have seen a savage beast that can turn on us and rip our guts out, leaving us bleeding and hurt.

Of course all those retirement planners and investment counselors warned us that the market was volatile and that we could lose all we invested. But then they turned around and asked us whether we wish to invest for a 7% return per year, or 10%. Indeed, they sounded similar to the clerk at McDonald's asking if we wished to super size our Combo Meal. Accustomed to the mind numbing disclaimers invented by lawyers, we assumed the warnings about possible losses of our investments in the stock market were merely the same drek we see when we purchase new software.

It has been nearly two generations since we have seen a real bear market in the United States. By bear market, I mean a stock market that goes down by 50% or more. It is a scary thought. Is this a market like the 1930's or the late 1960's-70's? I don't know. By the time you read this, we could all be breathing a sigh of relief as the market soars back above 10,000. Or we could be shaking in our boots as the Dow resumes its dive. Maybe it will do both.

I started following the stock market at an early age. I can remember charting stocks on graph paper, by hand, on the kitchen table. I couldn't invest because I didn't have any money. But I traded on paper and in my mind. With paychecks from my first job out of college, I bought some stock in a CB radio manufacturer. I bought at $ 0.75 a share and watched as it rose to $ 24 a share. I then rode it all the way down to bankruptcy, finding out the difference between trading on paper and trading with money. I would have said that I learned the difference, but I am afraid there is a good chance I would ride it all the way down again. So the word "learned" is probably not the right one. Much later, I bought Enron at $ 12 per share because it couldn't go any lower. We all know how that turned out.

The financial future for many of us looks differently than it looked a short time in the past. Whether the market rises back as swiftly as it fell, or continues to drop, we have been surprised. Something totally unexpected has happened, and many of us are groping for a plan of action. What do we do?

At a time like this we seek wisdom. We seek a model of action to guide us in how we should react to such events. Those who came before us were no wiser, or no simpler, than ourselves. But since they came before us, we can learn from their lives and seek to emulate their example, or avoid their mistakes. As you will not be surprised to learn, the American Civil War provides an example to me about what can happen when one is caught by surprise and at a severe disadvantage.

In the early spring of 1863, Robert E. Lee's Army of Northern Virginia reigned supreme. They had defeated their opponent repeatedly, the Union Army of the Potomoc under various generals having fallen prey to Lee's genius. A new general was given command of the Union Army by the name of Joe Hooker. Young and charismatic, he laughed at the elderly Lee and declared that God had better have mercy on Lee, for he would have none.

Putting in place a brilliant plan of action, Hooker surprised Lee, exulting in his mastery over his opponent. Many would say that Hooker's plan was genius; with the first part of it executed perfectly. Caught between the jaws of a trap and outnumbered 3-1, Lee was surprised and in a bad way. Many investors are in a similar position today. Realizing that he was in a very serious position, Lee devised an audacious response. And importantly, he acted on it.

Two days later, Hooker has been surprised and his army shocked by Lee's counterpunch. Reeling from an attack he had not expected, he faced his situation. His plan was now in ruins, but he still vastly outnumbered Lee and had a very strong position. But he needed to act. However it seemed that Joe was in shock from the unraveling of his plans and was unable to make a decision. While Lee improvised and attacked, Hooker daydreamed and was unable to concentrate on what he needed to do. His officers waited in vain for orders while Lee's smaller force struck again and again.

Known today as Chancellorsville, it was nearly the end of Lee's career. Instead it became what many regard as his greatest victory. Joe Hooker put together a great plan and put it into action. But when reality kicked back, he fumbled and failed to act. Today Robert E. Lee's reputation as a leader of true greatness is secure, while Joe Hooker has given his name as a euphemism for the world's oldest profession.

It didn't have to be that way. But they both were given a catastrophic surprise that changed all their plans. How they reacted when reality kicked back is how we remember them.