Our offices are located on the top floor of a bank building in old town Rock Hill. Nearly every day I find myself sharing the elevator with one or more of the resident bankers. Last week I struck up a conversation with one of the loan officers. With all the pressure on banks, especially the banks that received the TARP funds, I was curious about this banker's business. I could only fit in a single question during our shared elevator time, and it was; "Are loan applications increasing?" The answer was a quick and simple, no! In fact, my elevator partner added a comment that immediately formed a pit in my stomach. Every one of his customers are so afraid of the future that they have no desire to borrow money.
As we have been told by so many of those "experts" out there, the economic recovery has begun. However, knowing that many of us share a fear that this economic recovery may not be happening, resulting in a double dip recession and another round of market sell-offs, the banker's comment chilled me. You would think I'd be able to take the comment in stride. After all, this is just a single banker in a small town relating his personal business experience. Why should this have any impact on my outlook for the nation's economy or the stock and bond markets as a whole? The answer is just as plain and simple as our banker's response to my question, it shouldn't.
Throughout the years I have received countless opinions from unending sources concerning the economy and the stock and bond markets. Most of these opinions are of course not delivered face to face. I easily throw out these impersonal messages, treating them as nothing more than noise, but the one on one conversations stick. And yet they have no more meaning than the other noise I receive daily. It seems, at least in my case, that I am more likely to fall victim to the law of small numbers when the message is delivered in person.
The Nobel Prize winner, Daniel Kahneman, along with his partner, Amos Tversky, have been given credit for the foundations of "Behavioral Finance". Back in 1971, they published a paper in the Psychological Bulletin where they state, "We submit that people view a sample randomly drawn from a population as highly representative, that is, similar to the population in all essential characteristics". Today we are able to instantly gather information from around the world, yet the majority of us have an intuitive belief in anecdotal evidence delivered by someone we consider our neighbor. Because of this, I am biased towards my banker's comments, giving them far more weight than they deserve.
Intuition plays a powerful role in our daily cognition, and the law of small numbers is universally shared by all of us, independent of our education, nationality, race, creed or sex. In fact, it is so strong that we seek out and find reinforcing opinions verifying our intuitive leaps. The natural human tendency to place trust in our neighbors is often times beneficial. However, when it comes to investing you must acknowledge and defend yourself from this. Our defense has been to create rules which require us to formulate an opinion based on a very large sample of data. This mechanical set of rules works for our firm to override the impact of this behavioral law in the management of our portfolios. What is your defense?
Anderson Griggs & Company, Inc., doing business as Anderson Griggs Portfolio Management is a registered investment adviser with the US Securities & Exchange Commission. Pursuant to laws and regulations Anderson Griggs also maintains notice filing with several individuals state regulators including North and South Carolina. Anderson Griggs only conducts business in states and locations where it is properly registered or meets state requirements for advisors. This commentary is for information purposes only and is not an offer of investment advice. We will only render advice after we deliver our Form ADV Part II to a client in an authorized jurisdiction and receive a properly executed investment Management Agreement. Any reference to performance is historical in nature and no assumption about future performance should be made based on the past performance of any Anderson Griggs Investment Objective, individual account, or index. The authors of publication are expressing general opinions and commentary. They are not attempting to provide legal, accounting, or specific advice to any individual concerning their personal situation. Anderson Griggs Portfolio Management's office is located at 113 E. Main St., Suite 310, Rock Hill, SC 29730. The local phone number is 803-324-5044 and nationally can be reached via its toll-free number 800-254-0874.