September 2008. Britney Spears prepped for a triumphant return to MTV’s Video Music Awards, following a lackluster 2007 VMA performance. Cyclist Lance Armstrong announced he’d come out of retirement to compete in the next Tour de France. Hurricane Ike had become the fifth hurricane of the Atlantic hurricane season. Delegates at the Republican National Convention named Arizona senator John McCain as their candidate for the November presidential elections. Actor Mickey Rourke was back in the spotlight thanks to the movie The Wrestler, which picked up the award for best film at the Venice Film Festival. Roger Federer won an astonishing fifth consecutive tennis title at the U.S. Open, while Serena Williams picked up her third overall, and first since 2002. British rapper M.I.A. had a hit on her hands with “Paper Planes,” as did Atlanta’s own T.I. with “Whatever You Like.” Fans of NBC’s The Office eagerly awaited the premiere of the fifth season to see what kind of hijinks would ensue with Michael Scott and the rest of the Dunder Mifflin team. The defending Super Bowl champion New York Giants beat the Washington Redskins 16–7 in the NFL’s season opener.
Then, less than two weeks into the month, the world changed. Forever.
A financial panic engulfed stock markets, individual investors, and world governments alike. And panic was indeed the perfect word for what happened in the fall of 2008. Writing in the nineteenth century about market panics, Yale professor William Graham Sumner defined one as “a wave of emotion, apprehension, alarm. It is more or less irrational. It is superinduced upon a crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy.”1
We’d seen a preview of this madness earlier that same year, as escalating leverage and a slowing housing market crippled debt-rich companies like investment banking firm Bear Stearns, which was forced to sell itself under much duress to JP Morgan (which had the backing and support of the federal government for the purchase) in March 2008 for a bargain price.2 The housing boom, fueled by subprime borrowing and backed by banks and Wall Street companies looking to cash in on it, began to unravel. And as it did so, it quickly became clear that the credit markets, and the balance sheets of just about every bank and financial firm under the sun and moon, were filled with horrid loads of bad debt. Indeed, it was a “real and inevitable” crisis.
Bear Stearns’ demise spooked the market and investors in March. The world then watched as one troubled bank and hedge fund after another revealed that they, too, were suffering under the weight of bad loans, leading us limping into September, when the bankruptcy filing of the storied and debt-laden financial firm Lehman Brothers (the government refused to step in here as they had with Bear to make sure a sale of the firm happened) sent the markets over a cliff. The credit markets, both between businesses and between businesses and individuals, ground to a halt. No one knew who was hiding what in their financial statements. No one knew which balance sheets you could trust, and which you couldn’t. It seemed safer to assume the worst, and it seems that’s what just about everybody did.
As one famous sage has said, “You only learn who has been swimming naked when the tide goes out.”3 In the fall of 2008, Wall Street was a virtual nudist colony. And people, it wasn’t pretty, as if I need to remind you.
Stock markets dropped dramatically, leaving investors to hang on for dear life. Volatility was the word of the day, with the so-called “fear index” reaching new heights as the markets reached new lows. Consumer confidence and investor sentiment plummeted right alongside stock prices. The very future of the economy was uncertain from one minute to the next, with one established financial company after another at a precipice, dangling over the edge, not sure what was ahead.
Hello, panic.
By October 6, 2008, the Dow Jones Industrial Average fell below 10,000 points for the first time since 2004. Three days later, it would drop below 8,600. That same day, October 9, the Standard & Poor’s 500 index (which tracks 500 of the largest companies in the United States) marked a 42 percent decline over the past year, easily wiping away gains that had taken years to build. This milestone came less than four short, painful weeks after the Lehman Brothers bankruptcy.
It was a time that tested the mettle and tried the nerves of even the most seasoned investor. I watched, wide-eyed and with no small amount of horror, as my portfolio (containing, in some cases, shares of companies I’d owned for more than ten years) shrank to just a wisp of itself. How low could it ultimately go? Well-run companies that had nothing to do with the banks’ or financial institutions’ troubles were slaughtered right alongside them. You would have thought popular consumer brand and retail companies had suddenly started dabbling in mortgage-backed securities versus selling their soft drinks and leggings.
Flipping on the television each morning became an act of desperation and adventure, in a strange sense. I felt compelled to look, to see what had happened overnight, to see what new fresh awful thing was going to be inflicted on us that day. To compare it to a car wreck, where you honestly don’t want to look because you fear what you’ll see, but you seem unable not to, is apt.
Only in this case, there’s a crucial difference: We were all in this car together as it crashed, leaving us in a mangled heap.
The hair-raising drops and sheer panic had breathless commentators struggling to keep up. News was breaking so fast, it was nearly impossible to know the latest, most up-to-date information. Important people in fancy cars and fancier suits in places like Manhattan, Washington, D.C., and London were coming and going from meetings, their entries and exits broadcast on television as if they were celebrities. (Meanwhile, Britney did just fine at the VMAs, second time around, thank you very much.)
Through it all, a man sat far removed from the hubbub of New York City and Washington, D.C., in the Midwest, in quiet, placid Omaha, Nebraska. He watched, as he’d watched so many times before, as the world was seemingly coming to an end. He heard the shrill voices on TV and even he probably couldn’t escape the daily, even hourly, deluge of photographs of Wall Street traders looking horrified, frazzled, or just plain resigned to it all.
Then, he did what any rational person should have done in the face of so much fear. He took a deep breath, steadied himself, and started buying stocks, putting $20 billion to work in companies like Goldman Sachs and General Electric. It took courage, fortitude, and an ability to look past the current crisis to the eventual recovery of American businesses and the world economy.
It took the right temperament. Warren Buffett, our man in Omaha (and the “famous sage” quoted earlier), didn’t panic and sell. He remained calm, and he assessed the situation. And when he did, he acted from a place of certitude, backed up by years of experience. He encouraged others to do the same, reminding them that we’d been through tough times before and we’d come out ahead each time. He also reminded investors that the best time to buy stocks was when everyone was fleeing the market, leaving bargains galore ready for the taking.
To say that this was an easy mindset to adopt during this frenzied time period is an understatement of colossal proportions. It’s demoralizing to watch your 401(k) grow smaller by the day, by the hour even, for weeks on end. It’s exhausting and incredibly disheartening to watch your nest egg, your retirement account, or the kids’ college fund all evaporate. It’s like we were all just being beat over the head repeatedly and we couldn’t escape it. The hits, they just kept coming and coming.
I managed to buck up and actually buy some more shares of a few companies I already owned on the Tuesday after Lehman filed for bankruptcy. And I am not exaggerating when I say that was one of the hardest things in investing I’d ever done. Actually making that decision, that choice to willingly push myself back into a market that was already, even at that early stage, leaving me bloodied and bruised, was so difficult. It was a scary time and it took every ounce of willpower I had to click the little “buy” button on my broker’s website. Everything in my body was telling me not to. Luckily, my head knew better and overruled the stark fear coursing through me.
Once I bought those shares, though, the pain really began. I had no idea that weeks and months of a whipsawing market lay ahead of me, testing my ability to hunker down and hold on. I never sold, though. I waited it out. And now, looking at the returns on two of the three stocks I bought more of that day (Apple Computer and Chipotle Mexican Grill), I’m happy I did. As for the third? Well, they can’t all be winners now, can they? (Cough, Chesapeake Energy, cough.)
Warren Buffett has built a long and enviable career in the financial business, with a track record most investors and money managers can only dream of (and would probably kill for). For nearly five decades, he’s been analyzing companies, investing in the best of them, and building wealth. He is absolutely without parallel. His ability to pick stocks and invest in companies that profit and endure is next to none. And yet what truly defines Buffett, what makes him the investor he is today, what separates him from everyone else, from all those other investors over the years, is his remarkable temperament.
The American Heritage Dictionary defines temperament as “the manner of thinking, behaving, or reacting characteristic of a particular person.”4 In the world of investing, temperament manifests itself in whether you are ruled by emotions when you make decisions, causing you, for example, to buy and then freak out and sell before you should. Whether you take on too much risk. Whether you’re frenetically moving into and out of stocks without ever having a clue as to what the business behind them actually does. Whether you let yourself get rattled by market movements to a paralyzing point, or whether you look at declining prices and see opportunities.
Buffett himself has talked about the importance of temperament, saying, “The most important quality for an investor is temperament, not intellect. . . . You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”5
He’s also said, “Success in investing doesn’t correlate with IQ once you’re above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”6
Talk about “trouble,” indeed. We can surely point to temperament—the wrong kind, that is—when looking for some of the root causes of the financial crisis:
• Short-term thinking in abundance
• Risk taking in ridiculous excess
• Debt levels that were completely beyond reason
• The irrational belief that the greed-filled moneymaking wouldn’t stop anytime soon
• The inability to see the long-term consequences of such poor decision making
• The cynical profiteering off the next rube around the corner
So long as there was someone foolish enough to sell to at an ever-higher price, whether we’re talking houses or stocks or packages of subprime loans couched as safe investments, the raucous party just kept on going.
Now, granted, lots of other factors were also in play here, leading up to the financial crisis. We can’t blame it fully and solely on temperament. It’s an enormously complex situation that built up over years and years. Incentives played a significant role, as did the regulatory environment and loose monetary policy. Competition among Wall Street firms was so fierce that in order to just keep up with one another, traders and financiers increasingly were unable to say no to anything. If a firm didn’t want to handle a deal because it was worried it would turn out badly, there was always another place down the street that would. However, temperament did indeed have a role.
Looking back, faulty temperaments can be discovered at all levels of the unfolding crisis, starting with those folks looking for a slice of the American dream: the homebuyers themselves. Now, of course, there were responsible people who somehow got ensnared in the subprime mess, or worse yet, were tricked into taking on loans they never had a solid chance of actually making good on. But many folks deliberately took on extreme amounts of debt to buy more house than they needed or could afford (and, in some cases, more houses than they needed or could afford), often in the form of interest-only or adjustable rate mortgages, or sometimes combinations of both. It was known that these mortgages would eventually reset, possibly at much higher rates, meaning the payments on them could rise dramatically. The hope for many taking on this risk was that the housing bubble would continue to inflate without pause, and that home values would continue to rise into the stratosphere, allowing a safe, swift exit before the mortgage rate reset became an issue.
Alas, it was not to be.
Home values started to tumble, mortgages began to reset at untenable rates, and eventually the monthly interest payments started choking those who had so enthusiastically taken them on in the first place. Missed payments led to defaults and bad debt began to rise. This growing trend suffocated homeowners, then the banks and financial institutions, then the credit markets and stock market both here and worldwide, infecting the global economy from the ground up. And all because not enough people realized that long-term thinking and prudent risk taking are virtues, not curses.
On the other side of the aisle stood the bankers and the financial institutions—the titans of Wall Street—dirtied with even more temperamental filth than the shortsighted homebuyer. They may not have been the ones taking out the subprime loans, but they sure were minting a profit from them and encouraging the irrational behavior behind them to continue. And thanks to their willingness to leverage themselves at levels no reasonable person could ever support or understand, or hardly even fathom, they then spread the problems created by a collapsing housing market far and wide.
Questions began to arise about how reliable and solid the collateral of any bank actually was, since everyone had this toxic stuff on their books. That’s what caused the credit markets to start seizing up. No banks wanted to lend to one another, because they couldn’t trust that the counterparty would actually be able to pay them back. They couldn’t trust that their books didn’t hide dirty secrets like everyone else’s did. When lending nearly stopped between financial institutions, individuals weren’t far behind.
Panic, our old friend.
Once again, we see temperament at the scene of the crime. The wrong temperament was pervasive on Wall Street and was like gasoline on a fire. Any sense of acceptable risk went right out the window, as the money kept pouring in. The culture of the day became overburdened with macho, me-first, make-money-no-matter-what cutthroat attitudes. Traders were making millions thanks to massive overleveraging and ever more complex derivatives, many of which were based on not much more than lies. Risk taking, a lack of consequences, and short-term thinking ruled the day.
Even most of the very people propelling the mess forward knew it wouldn’t last forever. It simply couldn’t. But instead of realizing that the good times wouldn’t last and taking smart steps to invest with a longer-term outlook, the overriding reaction by most of the players was to just get as much as they could while they could—who cared about the consequences?
Not only was flawed temperament to blame in part, then, for the unfolding credit crisis, thanks both to homebuyers taking on too much debt and Wall Street following behind, doing the same, eager to make a quick buck, but it also made the resultant financial panic that much more pronounced. The stock market dropped, investors fled, cashing out their stocks at the absolute worst time; the stock market dropped again, investors fled . . . Lather, rinse, repeat. Meanwhile, Buffett sat calmly, waiting to make his move, waiting to buy shares of good companies at attractive prices, a very model of the right temperament—that of an investor and not a speculator.
Here’s the good news for us—we can learn to adopt a more long-term-focused temperament. We can become calmer investors. We can shift ourselves from speculators to an investment mindset. We can tamp down our risk taking. And if we don’t ever want to see the mistakes of the financial crisis and panic of 2008 repeated again, it seems smart to do so.
Your own investment results will improve as you learn to control your emotions and adopt a Buffett-like temperament. We might not be able to get every person working on Wall Street to focus on improving their temperaments, although that would undoubtedly make our financial system stronger and less erratic, but we can start here, with each other, with our own behavior.
Now, here’s where things get even more interesting, for at least one segment of readers and investors. We can all work to improve our temperaments, yes, but one group in particular needs to work a bit harder to do so. And they’re the ones who need it the most.
Men, I’m looking at you.
It must be said that the majority of traders on Wall Street, the majority of board members at financial companies, and the majority of executives at investment banks share one very notable quality—a Y chromosome. Wall Street, at least at the top, at least when it comes to decision making and the power to affect things, is still a boys’ club.7 And while homebuyers, both male and female, share the blame for the financial crisis, it was primarily men running the big money on Wall Street who exported the problem and made the situation exponentially worse.
Sure, there were a handful of women to be found on Wall Street in positions of power. Erin Callan, chief financial officer at Lehman Brothers in the heady summer of 2008, comes to mind (although it must be pointed out that she came into that position in September 2007, well after a big chunk of the leverage at the firm had been piled on).8 But by and large, it was, and it remains, a man’s world
So-called “feminine” qualities like relationship building, patience, and collaboration were markedly absent during the most recent market mania. Had there been more of that temperament around Wall Street, and indeed more women on the trading floors and in the boardrooms, it’s possible things wouldn’t have turned out as they did. And if things hadn’t turned out as they did, we would all have larger portfolios and fewer sleepless nights by this point.
Men, you’ve got some ’splainin’ to do.
Studies have shown that women have a different approach to investing than men do. They think long-term and don’t trade as much. They eschew risk more than men do. They’re better able to think for themselves and not bend to peer pressure. And they have much less testosterone, which affects markets in ways we are still discovering, thanks to new developments in the field of neuroeconomics. The way that women tend to approach investing is healthier and calmer, and it’s the way we should all approach investing, both men and women alike.
THE CURIOUS CASE OF ICELAND
Lots of weird things went down during the panic of 2008, but perhaps none was as strange as what happened in the tiny nation of Iceland. The country, just 300,000 citizens strong, saw itself transformed, nearly overnight, from a small, humble fishing nation into a hotbed of international financial activity. Former fishermen were trading derivatives, something they’d probably never even heard of before 2003. The country’s debt got so out of hand that at one point it was an astonishing 850 percent of its gross domestic product.9 Risk taking in excess, carried out largely by aggressive male bankers, drove this little country virtually straight into bankruptcy, with nothing but a collapsed currency and dashed dreams to show for their trouble.
So, who was called in to save the day? Yes, women. To correct course, female Icelandic politicians, bankers, and business minds took charge of the country’s faltering economy. A female prime minister was elected, and women in prominent financial positions found new audiences among frustrated Icelanders eager for change.
Most notable among them are Halla Tómasdóttir and Kristin Petursdóttir, who together founded Audur Capital in 2007, before the economy there went to pieces. Their company was founded on “feminine values” and survived the Icelandic financial crisis intact—a real feat, looking at the financial landscape there today.
Tómasdóttir described her thinking, and Audur’s values, in a February 2009 article:10
“We have five core feminine values. First, risk awareness: we will not invest in things we don’t understand. Second, profit with principles—we like a wider definition so it is not just economic profit, but a positive social and environmental impact. Third, emotional capital. When we invest, we do an emotional due diligence—or check on the company—we look at the people, at whether the corporate culture is an asset or a liability. Fourth, straight talking. We believe the language of finance should be accessible, and not part of the alienating nature of banking culture. Fifth, independence. We would like to see women increasingly financially independent, because with that comes the greatest freedom to be who you want to be, but also unbiased advice.”
Luckily for all of us, we have an outstanding model to guide us in the search for the desired investing temperament: Warren Buffett. When compared to the research on men’s and women’s investing styles, and the differences between them, Buffett’s investment style looks very similar to those strategies employed by women. His temperament, that which defines him and makes him the master investor he is, is more feminine, if you will, than masculine.
And if there’s any doubt as to the validity of this style and temperament versus something a bit more, say, macho, allow me to point you in the direction of his returns versus those of the investment houses on Wall Street in 2008 and beyond. Buffett’s been Buffett for decades, building his wealth over time, while the boys on Wall Street destroyed theirs—and ours, too!—in just several short months. Buffett’s compounded annual book value gain has been more than double the return of the S&P 500 for more than forty years, while they dashed our 401(k)s and sent the economy into a spiral.
There can be no question as to which is the more sustainable path, which is the smartest way to create wealth over the long term, which is the best way for us—for all of us—to invest for a bright future. It’s time for a change. It’s time to embrace the feminine.
It’s time, quite simply, for all of us to invest like girls, right alongside the greatest investor of all time, Warren Buffett.
So, here’s how things will go from here. We’ll start with a look at the research on the topic of women and investing. (You didn’t think we’d let that just slide, did you?) From there we’ll spend a chunk of time looking at how Warren Buffett exemplifies the ideal, feminine investing temperament. We’ll then learn some Foolish investment tenets to help you on your way to becoming an investor, or to improving your current investment returns if you’re already investing on your own. And we’ll close with appendices that are not to be missed: interviews with several investors who are models of temperament themselves, along with a recap of what we learned, and a reading list for those of you who want to learn even more.
So, gather your things, get comfortable, grab a drink, and settle in. Once you’re done reading this book, you will be ready to invest with a temperament that will help you be successful. Oh, and you’ll have fun along the way. Investing should be fun, after all. Buffett himself says he tap-dances to work each morning. By the end of this, you’ll be tap-dancing, too.