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When You Hear Hoofbeats, Think of Horses, Not Zebras: Thoughts About My Financial Guy and Me

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My financial guy (JS) and I go back more than thirty years, to just a couple of years after he first became a stock-broker and I first started getting involved in investing as part of my managing my money. In the course of those thirty-plus years, our business relationship has become also a friendship.

Among the virtues of JS as a financial advisor is that he's a solid and sensible fellow.

Having entered the business in the early 70s, and continued on into the new millennium, JS has seen both bad times (1973-82) and good (1982-2000) in the market. He wasn't one of those young turks on Wall Street in the 1990s who, never having seen a real bear market, thought that what went up could not go down. Nor was he one of those enthusiasts who bought the latest "this time it's different" illusion-- an illusion according to which it really was appropriate for some high-tech company that had never yet earned a profit to have a larger market capitalization than that of old established American blue chips.

He's got a basically stable, Republican-type temperament that resists panicking when there's "blood in the streets" (and so he counseled staying put when many frightened investors were stampeding for the exits at the bottom in 1982) and that also resists irrational exhuberance (and so he steered clear of stocks with three-digit P/E's in the late 90s, when the NASDAQ was about to lose 80% of its value).

He knows a lot about how the markets have behaved over the past several generations, and he advocates a course that's premised on the notion that as things have been so are they likely to be in the future. There will be ups, there will be downs. Over the long haul, stocks go up, and they earn better returns than things that don't entail similar risks-- like high-quality short-term bonds.

Yes, things can go wrong. But there have always been things to worry about-- always been worst-case scenarios. The best markets climb "a wall of worry."

As it has been, so shall it be. He's like the guy who wrote Ecclesiastes: nothing new under the sun.

He's never greatly alarmed. He never thinks the world has changed. And he's usually right.

A "new era," and "unprecedented development," a great catastrophe-- all these things are much rarer than are the declarations one hears that they are at hand. He didn't agree with me in 1999 when I wanted to hedge against possible losses from a y2k dislocation-- he didn't buy the scare talk, and of course he proved right.

That old medical adage well suits his world view: "When you hear hoofbeats, think of horses, not zebras." In other words, most of what patients will present your average doctor will be colds and indigestion and heart disease and other common ailments, while the rare diseases they heard about in medical school they'll likely only see in the text books. For every time a fever signifies some dramatic, news-making disease, a doctor will see a thousands of cases of garden-variety flu.

JS thinks horses. And he's been a valuable and faithful ally helping me deal with the various garden-variety challenges to my financial health.

But my friend JS also has the fault that goes with his virtue. The problem is, I'm not sure that JS would ever think zebras. Too sensible to ever be a Chicken Little, I suspect that if the sky started falling he'd not notice.

JS inhabits a world of normalcy. And sometimes --even if rarely-- history moves outside of what has been normal.

That's why in my most recent investment moves I have acted with his help, but without his agreement. You see, my friend JS sees the presidency of George W. Bush as American politics within the range of normalcy.

As a good, conservative fellow, and as one who's main community and subculture is entrenched in the world of business, JS is naturally inclined to vote for Republicans. He's a moderate person, and has no lust for the radical transformations that people like Pat Robertson or Tom Delay would impose on us. But as a herd of zebras have taken over his political party, he's been thinking horses. And though no great fan of George W. Bush --he'd never suggest that God had chosen him for his crucial moment-- he does not see anything unusual going on. And if the Republican Party has morphed into something completely different under his feet, he's not noticed it.

I, of course, see it differently. I see a degree of irresponsibility and even criminality unprecedented (at so high a level) in American history. It is because of what I see as the extraordinary, unprecedented nature of this moment in our history that I am working full-time to combat a regime my friend JS sees as within the bounds of the normal.

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Andy Schmookler, an award-winning author, political commentator, radio talk-show host, and teacher, was the Democratic nominee for Congress from Virginia's 6th District. His new book -- written to have an impact on the central political battle of our time -- is (more...)
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