In the early 1970s I found myself in a similar situation, trapped on a deserted New York City subway platform by two young men armed with lead pipes. Like the old man, I had no place to run and no chance of winning a fight, so I had to figure out another way. With my waist-length hair, no shirt, and Kelty backpack, I knew I looked unusual. Deciding to add the unexpected to the unusual, I flashed a stupid Gomer Pyle grin, walked up to them and let out the most ear piercing Minnie Pearl “How-Dee” I could muster. It set them back on their heels, and I could see in their eyes that they were confused. Not wanting to lose my advantage, I spun a yarn, which was actually true, about hopping trains and hitchhiking to see my sister on Staten Island. However, I deviated from the truth when I claimed to be broke – and panhandled my muggers. “Man, we’re supposed to be rolling you,” was the retort from one of my assailants. To which I replied, “You mean like down a hill?” and again flashed my Gomer Pyle grin. The other guy dropped his hands and, in exasperation, ordered his accomplice to “Give him the money.”
A study by Deutsche Bank, quoted in The Economist, suggests that investors may also be backed into a corner. Their statistics show “The average… prices of equities, bonds, and residential property… is above the level of 2007 and close to an all-time high.” With valuations so high, investors are worried. These financial concerns can, writes author Jason Zweig, “…ignite the same fundamental fears you would feel if you encountered a charging tiger, got caught in a burning forest, or stood on the crumbling edge of a cliff.” And, just like the innate reactions both I and the old man had to physical danger, the book Portfolio First Aid informs us that “Adversity in the markets is almost without exception met by the most basic instinctive human response of fight or flight.”
In recent years, the fight portion of the response has triggered a rush by investors to alternative investments in an attempt to maintain returns or to dampen losses by improving diversification. But the consulting firm, McKinsey & Company, reveals that the boom in alternative investments is something of a paradox, because the returns “…have lagged behind the broader market indexes.” And Larry Swedroe, in Beware of Alternative Investments, questions the diversification claims because alternatives “…have exposure to the same factors that explain the returns and volatility of publicly available stocks and bonds… [and they become more correlated with stocks and bonds when there is a] flight to quality.”
The flight to quality is the other end of the spectrum from the fight response. Investopedia.comdefines it as “The action of investors moving their capital… to the safest possible investment vehicles [such as] … government securities and money market funds.” According to the Association of Individual Investors, “Such an action limits the immediate damage to a portfolio, but can cause an investor to miss out on the big rebound that follows a large drop by not jumping back into stocks soon enough.”
The old man and I resisted the instinctive response to imminent bodily harm and survived. Warren Buffet has shown that if you can resist the instinctive response to looming financial danger you cannot only survive but even prosper. He calls alternative investments “a fool’s game” and sees volatility as… “a buying opportunity.” So, when you’re gripped by fear, and fight or flight seem to be the only options, it’s time to stop and think of another way. If you don’t, you could suffer a severe financial mugging.