"Boring is Good"

Sydney M. Williams

Thought of the Day

“Boring is Good”

March 9, 2010
In the past month there has only been one day during which the market moved more than 1.5% – February 16, when the market closed up 1.6%. Yesterday morning, one of the younger members of our staff lamented the lack of excitement in our markets – how boring they have become. His reasoning, for a firm such as ours, was not entirely misplaced. After all, we are in the commission business. Active markets provoke trading and trading generates commissions.

However, to those of us, of a certain age, boring can be good. In fact, to most of those of us who dealt with customers during the chaotic days from mid September through mid November 2008 boring is very good. The chasm we peered into seemed bottomless, and might well have been.

A little over a month ago Paul Krugman wrote an op-ed in the New York Times, entitled, “Good and Boring”. He wrote of the irony that “boring” Canadian banks, which performed in exemplary fashion during the recent crisis, have received little publicity, but should serve as examples worthy of emulation. “Man bites dog” has always had more fascination than its obverse, so it is unsurprising that the near disasters in Iceland, New York, London and now Greece have consumed the attention of Washington and the Press. Yet, as Professor Krugman writes, boring can and should be a good master.

Today marks the one year anniversary of the twelve year low we made in our markets, and, curiously, close to the tenth anniversary of the peak of the tech-internet cycle that marked the end of the great bull market of the 1980s-1990s, all of which provided the “lost” decade we have just completed. From the highs in October 2007 we crashed down a steep slope losing 58% in value in 17 months, as the S&P 500 declined from 1576 to 666. While the market is up 61% from those lows, it remains 38% below the highs.

In terms of daily volatility, the numbers are dramatic and telling. During the 12 months prior to the market bottoming one year ago, the DJIA experienced daily volatility of up or down 1.5% on 110 occasions, or about 44% of the time. The 12 months subsequent to the bottom have seen similar volatility on 46 days, or about 18% of the time. And 17 of those 46 days occurred in the first two months of the recovery! The road back has been more comfortable than the hasty decline.

I am not sure a lesson can be drawn from these observations, but as a hiker I do know that one can last longer and go further walking up a gentle slope than ascending a cliff.

As for investing, there is little doubt that boring works. Warren Buffett’s Berkshire Hathaway is exhibit A. History demonstrates that almost half of long term returns to the equity markets are derived from dividends. Collecting dividends may not seem an exciting pastime, but the accumulation of wealth over the years permits numerous outlets for animal spirits.