What Kwai Chang Caine Can Teach US About Portfolio Management


The story of the boys soccer team trapped, and then rescued, from the cave in Thailand of course garnered a lot of attention. There are several aspects of this story that are interesting including how the coach used his experience living in a Buddhist monastery to teach the boys meditation in order to help them get through the ordeal.

This reminds me of my favorite episode of the show Kung Fu from the 1970's. In the "Superstition" episode (season 1, episode 12) Caine finds himself working in a silver mine. He gets thrown into a hot box for punishment with one other prisoner. He teaches the other prisoner how to meditate. They serve their sentence and the guards are baffled when Caine and the other prisoner come out none the worse for wear. They all also endure a mine cave-in but meditation wasn't part of that story line.

In a related note, Nassim Taleb tweeted the following;

To me, the message in the tweet can be applied to keeping your head during adverse market conditions. It has been many years since we've had an extended period of adverse conditions which raises the possibility that when the next bear comes around the number of people who panic and say this one is different will be high and potentially devastating for even more investors than the last go around.

In the last couple of years I have altered my diet to greatly reduce sugar intake but doing so requires accepting something that can be difficult to grasp which is that all the things that we were taught about high fat diets being bad for us actually pertains to sugar. It is sugar that causes all of the problems (incorrectly) associated with fat (do your own research and draw your own conclusion).

This concept has a direct application to the stock market cycle, one that I write about constantly which is that bear markets are all the same. The causes are different but the market manifestation is always the same. The market goes down a lot and scares the hell out of a lot of people who proclaim this has never happened before, then it stops going down (maybe for no reason at all) and then it goes on to make a new high. The only variable to that cycle is how long it takes.

This too can be difficult to accept in the heat of the moment but in this light, all you need to do is stick to what ever investment strategy you planned out for yourself. That is easier said than done. I wrote about this extensively, all the way through the last cycle, starting before the Financial Crisis. I trained myself to do this and so can just about anyone else. Not everyone will be able to do this but most can. The first step is sitting here now, today, you simply accept that bear markets are a normal part of the stock market cycle. Doing this now while the market is high is easy but you really need to look back to whether you had an emotional reaction to any previous declines and if so, and more importantly; did you succumb to that emotion and panic sell? It's more the succumbing to emotions versus feeling them.

I say this a lot but it is very reassuring the extent to which saving money and benefiting from capital market price appreciation (note the way that is worded, it has nothing to do with out performance) relies on our behavior, something that is far more likely to be in our control versus the vagaries of the markets.

If, right here right now, you don't believe that arc of large decline ultimately followed by a new high then I would suggest you sell out or greatly reduce equity exposure now while the market is still high.