If investors thought about the assembly of their investment portfolios as if they were packing a parachute, there would be several helpful lessons that they might learn from that mental exercise.
First, while some investors may have been somewhat cavalier about who was packing their portfolio "parachute" prior to the current bear market, 2008 probably changed all that for just about everyone. Naval aviation hero and Vietnam veteran Captain Charlie Plumb has written about his experience of being shot down over North Vietnam on his seventy-fifth combat mission, and of later meeting the rigger who packed the parachute that saved his life.
After meeting him, he reflected on "how many times I might have passed him on board the Kitty Hawk" and"how many times I might have seen him and not even said 'good morning,' 'how are you,' or anything because, you see, I was a fighter pilot and he was just a sailor." But after having to actually use his parachute, ejecting "at a high rate of speed, close to the ground" he was overwhelmingly grateful to that rigger.
Having experienced a bear market more ferocious than any since before World War II, and having seen some portfolio "parachutes" that were not packed in a way that would enable their users to live to fight another day, investors should now be much more concerned with who is packing their portfolios and what method that rigger is using.
One good option is to learn how to pack your own parachute. We have written about this option in various previous posts, such as this one. Needless to say, if you keep in mind the analogy of packing your own parachute, it would behoove anyone who chooses this option to take the time to learn how to do it properly, and to exercise a high level of diligence in the process.
Many investors actually think they are packing their own parachute, because they assemble the contents of their account by themselves, but they are actually using portfolios that are being managed by someone else. If you use mutual funds or other vehicles that are managed by someone else, then the actual portfolio management is being done by a professional manager.
We have discussed some of the drawbacks of using mutual funds, such as in this previous post. One of the biggest drawbacks, which is easily understood using the parachute-packing analogy, is the fact that most people who are using mutual funds or other "mass-produced" financial products have never met the people who are actually packing the parachute. In normal times, most people don't give that a second thought, as illustrated by the reflections of Captain Plumb. But, when there is a serious situation like the events of 2008, who that person is becomes more than a minor detail.
We believe that investors should pay very close attention to who that parachute packer is. They should, if at all possible, meet that person, look into their eyes, and understand the method they use -- before they invest with them (before jumping out of the plane, in other words).
Sadly, the current structure of the financial industry is geared towards the mass-distribution of parachutes by individuals who do not actually pack parachutes themselves. They are not qualified riggers, nor do they really have much interest in ever becoming qualified at it. They enable investors to feel like they have met and examined the character of someone involved with their parachute, but in fact the investor is only meeting with the person who is handing them a parachute packed by someone else (we have visited this topic in previous posts such as this one and this one).
Finally, we believe the parachute analogy is helpful in dispelling some of the academic theories that have infiltrated the investing world far too much in the past thirty years or so. As discussed in "Beware of the witch doctors of modern finance," a famous article in 1975 made an unfavorable comparison between "the world of practical operators in the stock and bond markets [. . .] and the new world of the academics with their mathematical stochastic processes." He suggested that the practical operators were inferior to the "academics with their mathematical stochastic processes," and the financial world was only too happy to agree.
In retrospect, and in light of the parachute analogy, it is astonishing that anyone would abandon the experience of men who had spent their lives packing parachutes (and jumping them -- entrusting their own fortunes to their handiwork) and instead put their trust in the theories of academics who had in fact never jumped in their lives!
For later posts on the same subject, see also:
- "Don't get off the train, revisited" 04/13/2009.
- "'Inflection points' and the growth stock theory" 08/06/2009.
- "It's all about the thought process" 07/29/2010.
- "The dance of the hippos" 08/10/2010.
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