Be centered, be still -- 2011

We, along with the rest of the civilized world, are of course horrified at the awful developments in Japan as a result of the massive earthquake and tsunami.

From an investment perspective, in times of great catastrophe or calamity, our professional experience suggests that the best response for investors is to pursue a philosophy which we describe in the phrase, "be centered, be still."

We have written about this concept before, most notably here and here, and we explained that our definition of being "centered" (in terms of investment) can best be defined as "remaining within a consistent discipline; not making rash changes that represent a departure from the discipline."

Similarly, we argued that being "still" does not mean "doing nothing" but that it means "continuing to act in line with the principles of an investment process." We have observed that during times of great turbulence, many are tempted to either abandon their process (if they ever had one) or alter it in the face of events that cannot help but arouse strong emotional responses.

The most recent catastrophe has inspired a host of irresponsible predictions, some of which we believe are causing investors to overreact. Misinformation spurred by dubious claims of "imminent" catastrophe almost always prove to be hyperbole and can cause investors to make poor decisions regarding their long term investment and finances.

Yesterday, for example, an official from the European Union Energy Commission, Guenther Oettinger, stated that the Japanese nuclear accident was effectively "out of control". This comment came a day after this same official stated Japan was facing an "apocalypse". Apparently, this official's statement was at least partially based on the same sensational media reports the rest of us are getting. Hardly a responsible manner of conduct from someone in a perceived position of authority!

In his recent television show, popular host Glenn Beck engaged in what professional investors call technical analysis (the interpretation of charts and chart patterns) and issued dire pronouncements declaring "a collapse of the financial system as we know it [. . .] I'm gonna show you some stuff -- don't kid yourself -- it's coming."

Many watchers may think that such statements carry authority, especially when they are backed up by four charts and someone with a pointer explaining about "trend lines," particularly in the wake of the tragic images from the disaster in Japan. We disagree with his specific line of argument in this example and do not believe that his simplistic explanation of broken trend lines presages the collapse of the entire financial system at all.

The bigger lesson, however, is that in times of crisis, authoritative-sounding voices can get people who probably should know better to panic in ways that they otherwise would not, and that can lead to consequences that they will later regret. We believe strongly that this is one of those times.

The events in Japan are horrible, and we are not in any way making light of them and the human suffering that they have caused and continue to cause. However, that does not argue that investors should throw away their investment discipline; on the contrary, we believe that in such times investors should be more careful to stay within that discipline than ever.

This is what we mean by the phrase, "be centered, be still."