Think of the Stock Market as Great Businesses—Not a ‘Hissing, Writhing Bag of Poisonous Snakes’

On this episode of The Long View, Nick Murray, author and advisor to financial advisors, breaks down how investors can get in their own way during volatile markets, how advisors can train their clients to stay on the path to their goals, and more lessons from his latest book, This Time Isn’t Different.

Here are a few highlights from Murray’s conversation with Morningstar’s Christine Benz and Amy Arnott.

Advisors, Human Nature Is Your Biggest Battle—Not the Markets

Christine Benz: Another key thesis of your book is that investors need to buy broad equity market exposure and then have the patience and fortitude to hang on. You talk a lot about human nature in the book. You have a section called the “human nature problem.” Can you talk about some of the key issues that are impediments to investors just sticking with that broad market exposure?

Nick Murray: Well, I think all of them attend upon one critical kink in human nature. And specifically what it is, is that in every other aspect of our economic and financial lives, we see price and value as being negatively correlated. That’s an excessively fancy way of saying when prices are lowered, we perceive more value, and we move toward them. And when prices go up, we perceive less value, and we try not to chase that. The entirety of the United States shops on the weekend of Black Friday to Cyber Monday. The whole country. Why does it do that? Is it because over that weekend prices were raised? No, it’s because prices were lowered, sometimes significantly so. The entirety of human behavior migrates toward lower prices, seeking higher value, except in one thing. And of course, it’s investments in general and equities in particular.

And that’s the mother of all sort of hardwired human nature kinks that causes people to fail as investors. And what I’ve said to advisors is 85% to 90% of your job is that, is the management of that. You make a plan. You set goals once. Assuming the goals haven’t changed and don’t change, you make a plan once. Assuming that, you have a portfolio that you’re going to work in so-called good times and bed, you’re going to go straight on. And that is what human nature finds it well nigh impossible to do. And so again, that’s what I suggest is the huge preponderance of an advisor’s craft.

Think of the Stock Market as Great Businesses—Not a ‘Hissing, Writhing Bag of Poisonous Snakes’

Amy Arnott: You make the point in the book that you think it’s important for advisors to train their clients that they own companies rather than stocks. Why do you think that’s such an important distinction?

Murray: I don’t think that’s important. I think it’s drop-dead critical. Again, because of human nature, everybody believes in the kinds of companies that they do business with every day, whose products and services they consume every day. That’s instinctive, I truly believe. I’m going to turn on my computer and use my Microsoft operating system every day. I’m going to Google something every day. Somebody in my family is going to buy something from Amazon every day. We bank at Chase. I can go on and on like this. And we’re going to do that regardless of what the market is doing. People believe in the companies and in the larger sense, the kinds of companies they do business with every day. If you said to somebody about the 10 largest companies his family deals with every day, if you asked him, would you stop using them if the stock market went down 50%, he’d laugh. He’d say, “no, of course not. I shave every day with the Gillette razor and blade. When we spill stuff, we use Bounty the ‘quicker picker upper.’ And so, we believe in Procter & Gamble.”

And then you turn around and you say the prices of not just 10 of these companies, but 500 of them are down 30%. And the entire populace goes out the window. And so, by far the most effective meme, if you want to call it that, that I’ve found is forcing, as much as they can be forced, forcing clients to think of themselves as the owners of great businesses, rather than as participants in that hissing, writhing bag of poisonous snakes called the stock market.

Do You Need to Transition to Bonds in Retirement?

Benz: We wanted to ask about asset allocation because you are clearly a bull on the power of equities, the long-term power of equities. In the book, you write that the rational seeker of lasting wealth will choose to be preponderantly, if not exclusively, a lifetime equity investor. I’m curious how you think our equity allocations should change as we age and as we get closer to needing to spend from our portfolios?

Murray: I don’t know why they would. I don’t know why anyone would choose to be an investor for the greatest possible long-term total return. The idea that you get out of stocks into bonds in retirement to me is an atrocity because what you’re doing, and clearly you must not be conscious of it, is you are trading off half the long-term return you historically get from staying in mainstream equities to do something else. The long-term real return, 100-year real return of mainstream equities is 7%. And of the most comparable bonds, high-quality corporate bonds, again net of inflation, 3%. What would prompt me—heading into what these days will probably be a three-decade two-person retirement—what on earth would prompt me to abandon half the long-term real historical return of equities to go into the bonds? It certainly can’t be income, because if I go into retirement today and I buy a slug of new 30-year, 6% bonds, then 30 years from now, when either my wife and I are still here, I’m still getting 6% while my cost of living has gone up 2.5 times at the long-term inflation rate.

That doesn’t sound like a really good idea. So, you might consider equities, which, at least since 1960 and probably before, have been raising their dividends at twice the CPI inflation rate, near about. And you would say that’s the real safety, and you’d be right. The most important, most reliable test of an investment’s long-term income-producing capacity is its long-term total return. And when you’re guided by that, you look at equities for the virtual miracle of dividend growth, and you say, for a 30-year run, that’s what I think is the safer bet, literally safer.