Rational Investing: Governments, economics change, but human behavior doesn't

Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.

My friend Jimmy the Oracle is always around to take me to task about anything I write that he disagrees with. He also likes to point out my missed calls, of which there have been several over the years.

So here he was, having found a tiny uncluttered spot on my desk on which he braced himself as he leaned forward to continue with, "Well, this time it really is different, because we have never had a terrorist attack before, so the markets don't know how to handle it. That's why it's different this time, and that's why I'm putting my money into CDs and Treasuries."

Jimmy, at least as long as I have known him, has never bought low and sold high, although there have been occasions when he has bought low and sold lower.

He has owned individual stocks and mutual funds (and probably commodities), usually acquired after they were featured in Money magazine or some other publication he chose to use rather than think for himself.

I've learned over the years that Jimmy, like most of us, needs to get it out of his system when he's on a roll, so I just listened for a while. When he ran out of steam, I asked if he wanted something to drink. He accepted, taking a can of Diet Coke and sitting back in his chair in a more relaxed mood.

"Jimmy, the attack on the World Trade Center was different, no argument there. And we have certainly seen how it has combined with a slowing economy and corporate malfeasance concerns to put the stock market in a funk. It's even worse than what we went through in 1973-1974."

Jimmy nodded agreement, "Never thought I'd see another bear market like that one."

"I didn't either. Do you remember what was going on then?"

I pointed to the Ibbotson chart on my wall that shows the performance of stocks and bonds since 1925 with bulleted highlights placed on the chart to indicate the major events over the years.

Jimmy stood up, leaned over the desk and traced out with his finger the lines for the 1973-1974 period, saying, "Oh, now I remember. The oil embargo and the Nixon thing. I hated those lines at the gas stations. And it irked me when he gave the peace sign when he got in that helicopter after he resigned."

Jimmy took it upon himself to look back a few more years. "Hmmm, here's the Kennedy assassination. Never forget where I was when that happened. And before that the Cuban missile crisis. That was nerve-racking. Wow, we have seen some stuff, haven't we?"

Both of us were too young at the beginning of World War II to remember that, but Jimmy recalled when the war ended because his mother gave him an old stew pot and a wooden spoon and told him to go up and down their street beating it as loud as he could.

"Only time that I can remember when she wanted me to make noise," he said with a grin.

He continued looking over the chart, commenting on the history we have lived through, events that included the Korean conflict, Vietnam, the Berlin Wall and the Gulf War, then slowly turned his head and looked at me with a wry smile.

"You know, Chuckman," he said, "you let me figure this one out myself. No arguing, no lecturing, you just sat there while I looked at the chart. When these things happened, the wars and resignations and such, most of them hadn't happened before, had they? That was the whole point of you getting me to look at the chart, wasn't it? You know, to get me to say that each of those times it was different and that the markets recovered and then went up."

There was just one point to make before moving on to why he should take advantage of the opportunities the market was presenting, so I told him something I have repeated often.

"Governments change, economic conditions change, markets change, but human nature doesn't. Investing is too often driven by emotions fear and greed. We saw the greed side during the tech bubble. Now we are seeing the fear side. When these extremes are reached, they call for using your head. A lot of people who talk about buying low and selling high were ecstatically, greedily, buying at the peak and are now selling out of fear."

"I hear what you're saying," Jimmy shook his head, "but I am still going to move my money into CDs and bonds."

Win the battle lose the war.

Next column: Jimmy does buy bonds, doesn't buy CDs, thinks about acquiring common stocks, and puts me in the hot seat.