Power Up Wealth podcast – Lessons From Past Bear Markets – Episode 43 transcript:
Sharla Jessop 0:00
In a world of change, some things can mirror the past. I’m Sharla Jessop, President of Smedley Financial. Today, my guest and colleague, James Derrick, will share some lessons from past bear markets.
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick is the Chief Investment Strategist at Smedley Financial Services. He holds a Chartered Financial Analyst designation. James, thanks for joining me today.
James Derrick 0:54
Yeah, I’m happy to be here. This is going to be an exciting topic, I think.
Sharla Jessop 0:57
I think so. You have a passion for researching, I know, and the market and economic trends. What fascinates you about what we’re seeing right now and human nature and challenges that it creates?
James Derrick 1:10
Wow, there are so many ways to answer this question. I think that what is fascinating is, the phrase “this time is different.” Because I’ve been around long enough to hear it every single time. Like this time is different in 2000. This time is different than 2008. This time is different in 2020. And this time is different than 2023. I mean, this time is always different. By definition, we have never seen this before. We have never gone through this before. And yet, you know, our current situation rhymes with history. There’s so many things that do repeat themselves.
Sharla Jessop 1:46
Tell us about some of those things that you’ve found in your research.
James Derrick 1:49
Well, as you mentioned, human nature. Human nature repeats itself. I mean, we always want to think there’s going to be a soft landing. Forbes had a fantastic piece where they put together several news articles. And we’ve got it in our latest newsletter. It’s fascinating. I mean, the soft landing was expected by economists in 1973, and 1978, and 1980 and 1989. And, and it just goes on. And we’re talking about a soft landing right now. And sometimes I just think we need to just embrace the possibility that, you know, there might be some hard times. Maybe we will have a recession. I think we will. It’s not going to be a surprise. And it shouldn’t be anything too scary, either. I mean, in my lifetime, we’ve had seven or eight of these. So it’s completely normal. I think we need to change people’s behavior. So to do that, it might require some hard times. So I find it fascinating. The other interesting thing is, and Warren Buffett said it well, he said only when the tide goes out, do you discover who’s been swimming naked. And I love this, my kids know this quote, and they think it’s so funny. But it is also so true. I mean, when did Enron fail? After the technology bubble burst. It’s not even a tech company, it was an energy company, but that’s when we discovered it. Bernie Madoff got away with the largest Ponzi scheme in history for almost two decades. He got caught in 2008. When when the economic tide goes out, I mean, we discover those who have been taking too much risk, those who have have made mistakes. That’s when we find out.
Sharla Jessop 3:29
Similar to what we’ve seen happen recently in the banking system.
James Derrick 3:33
Exactly. I mean, we’ve seen it in the banking system. The government was lowering interest rates after 2008. Inflation was low enough that they could. Every time there was even a hint of problems during the 2000 teens, the Federal Reserve did quantitative easing and lowered rates. And so we got kind of used to this environment of low rates and low inflation. And then when 2020 came and 2021, and the government felt like, hey, we’ve got a free pass, we can keep doing this. There will never be any consequences. And the truth is, is that the solution to every problem often creates a new problem. And so they took it too far. And we had too much demand too much inflation. Companies then realized that they could raise prices and consumers would still pay it. That was, you know, a real epiphany. Because back in 2010, 2011, I mean, companies didn’t dare raise prices. They were scared to death that consumers would pull back on spending. You know, we opened up Pandora’s box and it’s really hard to get everything back the way it was and that’s what we’re finding.
Sharla Jessop 4:49
It impacts everything. The solutions. Long term. We pay for it somehow.
James Derrick 4:53
It does. It’s sort of a day of reckoning, especially for those who weren’t prudent and you know, one of the scary things about that is just that a lot of young professionals, they don’t remember 2008. They may not have even been around and in 2000. So they haven’t learned those lessons yet.
Sharla Jessop 5:14
But to them a very scary time, then especially when we see banks starting to fail. It seems to increase the tension and emotionals and emotions surrounding the market. Why is that?
James Derrick 5:25
Well, I think it’s human nature that we are uncomfortable with uncertainty. When we see a bank fail, all the sudden, it opens up our eyes and to the uncertainty that exists in the world. You know, I used to have this little cartoon next to my desk, that had a guy walking around a minefield with all these bombs that had landed but had not exploded. And then he says to himself, well, I guess they were all duds. It was actually in the Investment News newspaper back in 2008. And it was fantastic. And it pointed out, you know, not everything that can happen that’s bad is going to happen. So it’s not that the sky is falling, and the world is ending. But it’s just that our eyes are open to the uncertainty. And so it’s only rational to feel a little fearful.
Sharla Jessop 6:14
I imagine that uncertainty changes people’s behavior, even though they think long-term. And they’ve been through those situations before, which I have and you have, every time. That doesn’t mean emotionally that it’s easier to deal with. You know there’s a lot of fear, concern worry, that comes in, in times of economic difficulty. I imagine in every household across the country. How does our human nature or what we do impact our financial security?
James Derrick 6:14
I mean this is really the key point is, is that we get into trouble when we let that fear start controlling our decisions. And so we begin thinking more short-term and we fail to see the opportunities. And so it really pays to be optimistic. I mentioned Warren Buffett earlier. I mean, he if you’ve ever heard him speak, he is so optimistic about things. I mean, he would love to see the stock market go down. He was on the phone with the President of the United States talking about the banking crisis. I don’t know what he said. But I imagine it was something like this. I’m really excited about the opportunity to buy. I want to buy companies on sale in the stock market. I mean, he was probably saying something like that.
Sharla Jessop 7:30
And this is a man who hasn’t always had only success in his investments over the years.
James Derrick 7:35
No, that’s a great point. I mean, that his company is, as everybody knows, is Berkshire Hathaway. That is named after what he considers to be his biggest failure of an investment. So it’s not that he’s perfect, but he’s very patient. And he’s very optimistic, and he welcomes challenges. You know, a recession would be fine for him. I mean, granted, he doesn’t have to worry about his day to day financial needs. But he’s extremely long-term. And that’s why he’s one of the best investors, you know, that we’ve ever had. In the newsletter article, I recounted a story about Michael Dunn, who I heard speak about a grizzly attack in Grand Teton National Park in 1994. I heard him speak up maybe eight or nine years ago, and he did what a lot of us would do. I mean, he, you know, he panicked. He saw the signs and he ignored them. And then when the bear attacked him, he started to fight back. Now, we all know when a grizzly bear attacks like, what do you do? You play dead! That’s a hard thing to do. You know, based on his recounting of the story, a very difficult thing to do. And it wasn’t until I think he embraced the possibility that he might die that he decided that he would try playing dead. That calmed the bear down enough that it got distracted. Michael Dunn explains it as a miracle that the bear did get distracted and ran off. The lesson there is it’s very difficult to play dead, it’s very difficult to do nothing. And oftentimes, in in long-term investing, the best thing you can do is do nothing. I mean, if you’ve got a good plan, you’ve already accounted for the volatility and the difficult times. It’s already built into the plan. If we thought there wouldn’t be no difficult times, we would take an infinite amount of risk. Your plans should include the possibility that in fact the certainty that there’s going to be tough times in the future and so you have to balance out your risks. And if you’ve done that properly, then you may not have to make any changes. You may not have to do anything. Just ride it out. I mean, it’s it’s very painful at times. You know, I know some some fantastic investors that just say I’m not going to turn on my computer and look at it. I know that if I look at it, that I’m going to do the wrong thing. So I’m not going to look and if If you’ve got a good plan, and people you trust, then that’s going to work just fine.
Sharla Jessop 10:05
I think the benefit of the plan and the backbone of the plan is its ability to help create emotional calmness. The idea is, you’ve planned for all different types of events, long-term, short-term, different market conditions, different inflation. If you stick with your plan, you should know that you’re still going to stay on track. But I think in the moment, it’s hard to separate the emotions from knowing what you should do.
James Derrick 10:29
Absolutely. I mean, from just a biological point of view, I mean, when you start feeling that fear, you start holding your breath. And I mean, what happens, I mean, there’s less oxygen going into your brain, I mean, you are not thinking, you know, like you would be if you were feeling calm. And even when you’re feeling nervous about the market, it’s important to remember that anything can happen. Anything can happen, even when I think I know, is actually I should say, especially when I think I know exactly what’s going to happen, the market has a way of surprising me. You know, stay optimistic, and realize that the bad times are just opportunities, you know, don’t don’t run away, when everything goes on sale. See it for what it is, it’s an opportunity, you know, and that doesn’t mean throw away risk and start buying. Because if you buy too soon, now you’re taking too much risk. And you can’t bear to hold on, you want to be prudent, you want to follow your plan, you want to manage your risk at all times decide based on your outlook, how much risk you’re willing to take, and then just wait it out. Because over long periods of time, we’re talking 10, 15. 20 years, you have a very good chance of making money through the volatility. In fact, I believe Jordan in his podcast that’s either just aired or is airing in the next week or two, is going to talk about the long-term returns in the stock market and they’re stunning. They’re so big.
Sharla Jessop 11:46
In order to take advantage of those long-term returns, you have to be in the market. You can’t be in you can’t be pulling your money and putting it in CDs or moving it out of the market where you don’t have the opportunity to move it right back in or to participate as the market turns around. You have to stay invested stay with your plan.
James Derrick 12:12
Yeah, I’d be looking for with my short-term money, I would be taking advantage of all of these short-term opportunities. And with my long-term money, I’d be looking to take advantage of the long-term opportunities.
Sharla Jessop 12:24
I think in the long-term opportunities, if you’re sticking with your plan, you’re already buying into it because you’re probably participating in a 401k, or doing investments outside of a 401k that are on a monthly basis that are consistent, and where you’re taking advantage of the market correction, because you’re buying every time you add money. It’s going in the lower point.
James Derrick 12:42
Absolutely. And I mean, that is a strategy that’s going to work. Timing the market is really quite difficult. Moving money out of the market completely and locking it into a different yielding account might not be the best thing. You might think to yourself. Well, you know, when everything calms down, then I’ll go back. And the fact of the matter is, is that by the time we realize that things are calmed down, we’ve probably missed a lot. There’s no telling. I mean, perhaps the entire bounce is mostly over by then. So, you know, I know it sounds a little cliche, people hear it all the time, but you want to stick to your plan.
Sharla Jessop 13:24
You know, James, I think one of the things I like most about your article is looking back at these different headlines, because when you look at the headlines, and many, many of these, you know have been during my lifetime, not all of them, but many of them. Actually all of them. I’m actually looking at dates now and unfortunately all of them yes have been during my lifetime. But it should give people hope because all of these headlines are negative throughout history. And every time we have a bear market or correction, the market comes back. We have growth and opportunity. So it’s even though it’s emotionally hard at the time, keep long-term perspective. Remember, there is light at the end of the tunnel, and there’s opportunity at the end of the tunnel as well.
James Derrick 14:05
Fantastic point. It may not be a soft landing. It usually isn’t when we’re in this particular situation, but that’s okay, because we’ll get through it.
Sharla Jessop 14:14
And control the things that you can control. You can control your plan you can control how you spend, how you save, how you invest, but don’t try to control things you can’t like the economy and the market. James, thanks for joining me today.
James Derrick 14:27
Thank you.
Shane Thomas 14:33
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Securities America. Inc., Member FlNRA/SIPC. Roger M. Smedley, Sharla J. Jessop, James R. Derrick, Shane P. Thomas, Mikal B. Aune, Jordan R. Hadfield, Registered Representatives. Investment Advisor Representatives of Smedley Financial Services, Inc.®. Advisory services offered through Smedley Financial Services, Inc.® Smedley Financial Services, Inc.®, and Securities America, Inc. are separate entities.
