Talking Points

Lessons Learned Mark Zinder Action Shot

My Mother, in all of her wisdom, once told me: "Believe half of what you see and none of what you hear." Advice well taken.

Those of us who have practiced the art of magic understand that individuals witnessing the illusion would be well advised to take the above mentioned advice one step further: believe none of what you see and question everything you hear. Our goals as magicians are to misdirect you into believing something that is not there and influence you to see it as if it was.

An optical illusion has the same effect. First you see it one way, then another. This time it is not the dexterity of the magician that is fooling you, but your most trusted analyst, your brain. You have been tricked into seeing something that is completely irrational: an old woman turns into a beautiful young lady, a chalice morphs into the profile of two individuals. What makes it interesting for me as a magician is not that the victim falls for the gimmick, but that almost every victim falls for the same gimmick.

The mistakes we make in trying to predict the future are like optical illusions. First we see it one way, then another. We err when we second guess ourselves; we make our biggest mistakes when we try to outsmart the magician who will tease the onlookers by accidently allowing the participants to get a brief glimpse into the foolery only to surprise them later with a completely different outcome. Lesson learned.

As we age, we grow to accept the art of magic for what it is -- a whimsical approach to being entertained. Another pearl of wisdom that my mother was happy to share was, "Fool me once, shame on you - fool me twice, shame on me." That is why magicians rarely perform the same trick twice. Fooled once, you not only anticipate the outcome but keenly search for the methodology.

Somewhere between the predictability of a magician's outcome and the pontification of an economist's forecast is where the similarities begin to diverge. We pay to be fooled by the magician but we pay dearly when we are fooled by the economy. The first rule of magic is to never tell how the trick is done; the second, as we discussed above, is to never do the same trick twice. These rules, part of the magician's creed, are always the first rules learned.

The same is true when it comes to economics. We have heard it many times: History repeats itself; buy low sell high; if it sounds too good to be true it probably is; and on and on. But despite our best efforts, we continue to fall victim, often thinking we have outsmarted the system just like we thought we had outsmarted the magician. John Templeton said it most succinctly when he stated that the four most dangerous words in the investment language are, "This time it's different."

It is never different. Sorry to disappoint.

To emphasize my point, I would like to make a few comparisons:

Currently, California is near bankruptcy. In 1975, it was the city of New York.
In 2008 it was AIG. In 1983, Baldwin United.
Today, CitiGroup. 1980, First Pennsylvania Bank and then in 1982, Continental Illinois Bank.
Today, General Motors. Yesterday, Chrysler.
The banking crises of 2007. The banking crises of 1907.
And to make my point crystal clear, last year, the S&P was down 37%. In 1907 the NYSE lost 37%. [1]

I was once told by Michael Price, "Bad news interpreted correctly can be just as beneficial as good news." It was Benjamin Graham that said, "Profit from folly rather than participate in it."

Even as many are referring to the recent economic events as a "Black Swan" episode, a once in a century occurrence, I beg to differ. What we are experiencing is classic textbook: a recession, a market correction, Federal Reserve intervention; a stock market resurgence which occurs four to six months before the end of the recession with small caps leading the way.

"Been there, done that."

As a student of the game, the question now becomes "what happens next?"

I am going to now shimmy out on a very thin limb and make market prognostications based on previous historical events. Investors with money sitting on the sideline, having gotten out in March, will start to get back in, now convinced of an ongoing bull market because of the 40% upturn. If history repeats itself, these investors, coming late to the party, will then witness a pullback of roughly 10% to 15%. At this point they will exclaim, "I'm the one - it's always me. I get in and the market goes down. Just get me out." At this point, the trillions of dollars sitting on the sideline, roughly 80% of which is institutional money, will pick up the pieces left scattered by the impatient and unknowing and will participate in what will be the next leg of the bull market. The investors that got out will again exclaim in dismay, "See, I told you it was me. When I got out it went back up." And then they will utter the words that will seal their ultimate fate: "Just get me out and put the money in CD's where it should have been all along."

Because now, they have been fooled twice.

A magician will never do the same trick twice: the implications become apparent because the period between the first time and the request to "do it again" is measured in minutes. For investors, the time is measured in decades. And while magicians won't give a repeat performance, the stock market has no such qualms.

Time not only heals all wounds but also erases the memories of what caused them as well. According to John Templeton, "To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward."

The trick is not to be tricked into believing that this time is different.