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Yelling ‘Fire’ In A Crowded Market

Courtesy of ZeroHedge. View original post here.

Authored by Nicholas Colas via DataTrekResearch.com,

Just over 2 weeks ago, there was a serious fire in the apartment building where I live. It destroyed a quarter of one floor and lasted just over an hour. Thankfully no one was injured, either among the residents or the firefighters who put out the blaze.

Regular readers know we at DataTrek are students of human nature, particularly in moments of high stress. With the benefit of a little time, I have assembled some lessons from this event. Hopefully you will find them instructive in two ways: planning for unforeseen situations, and understanding how to mitigate the effects of emotions on more prosaic endeavors like investing.

Lesson #1: Have a plan for everything. Seriously… Everything…

The fire broke out around 3am Saturday morning. My wife heard the alarms first. As I awoke I could smell a small amount of smoke. Not registering the time, I thought perhaps my neighbors had a grease fire in their kitchen. I threw on some clothes, grabbed the fire extinguisher, and opened my front door to see if I could help.

The smoke in the hallway was much worse, and my neighbors had their baby in blanket and were heading to the fire escape. Scratch the “Nick saves the day” plan. I turned back into my apartment, which was now filling with smoke at a quick rate.

We have a go-bag – I grabbed it, along with my briefcase and laptop. My wife did the same. “Open up the windows” were pretty much her only words at that point. Good idea… the smoke was getting bad. The only problem was that in the 2-3 minutes since we had awakened, the air was now unbreathable. I crawled from the windows to the front door and we walked downstairs.

Investment observation: plan for the worst-case scenario. A high-rise apartment fire is much worse than a market crash, but treat a 20% down day the same way. Plan for it. Talk through what you would do with your team. Not just in broad strokes, but discuss exactly what you want to accomplish. Sell stocks below your stops? Reallocate to equities? That’s your investment go-bag. Fill it up.

Lesson #2: Most people don’t follow Lesson #1

When we got downstairs, we saw that almost everyone was in his or her pajamas, robes and slippers. Honestly, my first thought was “I didn’t know people still wore pajamas… or robes… or slippers.” But they do. Being New Yorkers, everyone was remarkably calm. Since the building with the fire is connected into a complex of other structures, most people took shelter in one of those.

It struck me that in most buildings these people would have nowhere to go. It was about 35 degrees outside; this would have been a major problem. So as you consider similar scenarios, think about where you would go. At least carry emergency blankets like the ones marathon runners use in your go bag. I carry 4-5 to hand out, but thankfully that wasn’t necessary.

Investment observation: when market turbulence hit, understand most investors do not have a plan. That, to a large degree, is why asset prices swing around so much. Just because something is unexpected doesn’t mean it is unforeseeable. But most market participants will be caught unaware, and you need to incorporate that into your plan.

Lesson #3: Firemen have a plan

As I watched the NYFD put out the fire, I noted how they went about this very dangerous task. They don’t just blow a door open and start spraying water. They first hoisted a ladder and had a spotter climb it to assess the state of affairs. Only after some deliberation did they enter the building and get to work.

Also, they address high-rise fires with overwhelming manpower. I counted +10 trucks outside the building, and three NYFD EMT trucks parked out front. There were three gurneys with full medical equipment loaded on top staged by the front door. No matter what came out of that building, they seemed ready to treat it on the spot and get it to a hospital.

Worth noting: firemen check every apartment above the fire all the way to the roof, and this means breaking open a lot of doors. It’s all part of their process.

Investment observation: when markets become volatile you are in the crisis business more than the investment business. The fire department’s plans revolve around two goals: putting out the fire, and not getting hurt in the process. They go slowly, and they have plenty of Plan Bs/Cs/Ds. Investing during market turmoil is much the same: do the job, expect things will still go wrong, and stick to your process.

Lesson #4: Recovery takes time

Stay with me for one tangent… Many years ago, I took a trip to western Mongolia in the middle of winter to watch the local tribesmen hunt with trained golden eagles. I stayed with a family in their one room log cabin, which was heated with an old oil barrel turned into a stove. The only fuel available was the dried dung of Bactrian camels and Mongolian ponies.

That’s pretty much what our apartment smelled like once we finally got back upstairs. There is a whole cleanup industry that specializes in post-fire remediation, complete with industrial sized air scrubbers, purifiers and professional housekeepers. After four days of attention, the apartment still has a lingering odor… It will take some more time and attention to complete the task.

Investment observation: the comparison to market turmoil is obvious enough. There’s no such thing as a “V bottom” off a major low. The stink lingers for a while. Accept that.

Final Thoughts

As mentioned, no one was hurt in the fire. That, everyone will agree, is the important thing. Market crashes and/or turmoil pale in comparison to events that can harm human life.

In sharing this story I hope I have given you some food for thought about the importance of planning at home and at work. But if you have to choose one vector, make it the first.


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