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Cowboys and Market Crashes


Post by Paul McClatchy

It’s a rule in nature that systems strive for balance. When exogenous shocks occur, the system may alter but an equilibrium eventually is reached. Human systems, like the market, usually operate the same way. During the late 90s, when the dotcom bubble caused markets to surge 20-30% annually, Vanguard CEO John Bogle was fond of pointing out that the market will always “regress to the mean” or, in simpler terms, return to its average. His underlying warning was that the markets would eventually deflate to reflect the long-term average.

But we do have the luxury of being (occasionally) intelligent actors who through our actions can affect the equilibrium.

This brings me to the cowboys (you were probably wondering how that figures in). Oftentimes in the Old West, cattle men on a drive would have a stampede to contend with. A mass spooking and resultant running of the herd is caused by an exogenous shock to the system of the cattle-drive. Maybe a falling boulder, a gunshot, or just a spooked cow in the front. It causes panic and hysteria, and the herd moves in an unpredictable and usually counterproductive path.

To fix the situation, cowboys utilized a practice called ‘milling’ to end the stampede. They would ride to the front of the herd and turn the lead animals into the direction of the pack, thus bringing the stampede to a halt.

At times, investors resemble stampedes when a negative news report – or, in this case, a pandemic – creates a panic and a blind rush out of the market destroys wealth. During these times of market stampedes, we need to “mill” ourselves as investors and turn around and view this current event in the context of previous market crashes.

Some facts we need to remember:

  • Since the great crash of ’29 the US has seen 14 recessions and 21 bear markets.
  • In each situation the US markets eventually recovered and moved beyond their previous peak.
  • The largest market gains occur days and weeks, not years, after markets reach their bottoms.

As we currently look at staggering losses of -20 to -30%, we must remember Mr. Bogle’s advice and believe that this down market will eventually progress to the mean like all others preceding it.  Like the cool-headed cowboy milling a stampeding herd, we find ourselves aiding investors by dispelling the common myths and countering with facts.

My favorites are as follows:

“I saw this coming” – No one has the gift of clairvoyance prior to market crashes. Every market drop is followed by those who “foresaw” this event and jumped. What we don’t hear about are the multitude of others who made the same prognosis for crashes that never appeared (hint – remember post-‘16 election?)

But we have to do something” – No, not really. Selling out in a down market will guarantee recognized losses and erase previously accumulated wealth. We know that historically markets have returned from crashes. If liquidity is not an issue, then wait it out. If liquidity is an issue, this is why we suggest everyone have an emergency account.

“ We needed to make a change” – Maybe. Changes should be part of a strategic plan rather than a reactionary impulse. Changes due to a personal timeline shortening or due to the start of a new phase of the economy (recovery, peak, recession, trough) make sound sense. Jumping into a “new solution” to counteract the market (i.e. metals, cryptocurrency or collectibles) doesn’t work out very well. If an investment isn’t right for your portfolio after a crash, it probably wasn’t right for you prior to the crash. Portfolios should change over time, but not because of current market shifts.

Nobody enjoys seeing portfolio values plunge, but understanding that markets cycle like the seasons can give us a touch of the stoic cowboy resilience needed to wait for warming weather to return.

Planning Capital Management Corp is a Registered Investment Advisor with the SEC, and we are held to a fiduciary standard with all of our clients. We offer full financial planning in conjunction with investment advice and portfolio management. Should you have any questions or concerns about current market conditions, or just general financial planning questions, you can reach us at: (215) 709-5100 or