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Rhapsody for the Blues

2/12/2019

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Synopsis: A groundbreaking piece of music shook things up in the 1920s. We don’t think much about it today, but some shakeups are more difficult to forget. Especially for investors. 

     The music critic ambled down the aisle of Aeolian Hall, happy to be in the warm theatre and out of the February cold. He was a large man, tending toward portly due to his love of leisure, food and drink. He’d had a wonderful meal and some fine vintage wines at Tavern on the Green and was looking forward to losing himself for a time in his true passion: orchestral music.
     The lights went down as he shrugged out of a heavy coat.
     “Ah, just in time…” He murmured, arranging himself in his aisle seat where he could stretch out a bit.
     The conductor reached out with his baton and a trilling clarinet came to life. It soared for a moment, then longer, devolving into a melodic refrain that the entire orchestra soon took up.
     The critic raised an eyebrow. “Clever,” he nodded in approval.  Someone shushed him from the row behind, but he paid no mind.
     On it went, phrases soaring, instruments roaring, timpani drums joining the fray. The critic stopped nodding. And he stopped talking much to the delight of those around him. For many minutes, he just listened.
     And then it was over in a cacophony of piano keys, the final phrases still ringing in the rafters. He sat ashen face for a moment and then looked around as the lights came up.
     “What the hell was that?!” He sputtered. “Gershwin…that piano player… has either gone mad or….or….he’s a certifiable genius!”  He pushed his way toward the exit, calling out “Excuse me, Excuse me! I have a column to write!”
     George Gershwin and his Rhapsody in Blue, had effectively bridged the ages between two styles and brought backroom jazz to the forefront of acceptable popular music.  Granted, to today’s ears it isn’t very “jazzy” and in hindsight we don’t think of an orchestra playing sheet music to be in the jazz style at all.  But on February 12th, 1920 it was groundbreaking. 
                                                                      ***

     Since the groundbreaking or earth-shattering stock market crash of 2008, things have gotten much better for investors.  But last year brought back some bad memories and occasional colorful language. With markets on the rise in 2019, many still wonder: “why don’t I feel good about it?”  Here is an attempt to explain:
  • The human eye is considered “tri-chromatic,” meaning three hues and their additive combinations ac­count for our ability to see many different gradients of color.  While light is a continuous spectrum, our eyes are conditioned to respond to combinations of these three “primary colors”: red, blue and green. Note that this is an extreme simplification of the physiological science of light and color vision, but it’s the best you can get from some­one who studiously avoided the hard sciences and sought refuge in History and Economics.  ​The point is that many investors today don’t see the full spectrum, only the color blue.  After years of recovery in most stock indexes, investors feel less and less confident about the state of the world.  The red numbers from 2018 are overlapping the recent green numbers as things im­prove, leaving us with... the blues. 
  • Actually, the reason for this has less to do with the science of color than it does with inves­tor psychology.  Investors hate losses so much that almost any amount of gain barely makes up for it in their mind.  Even if they have broken even and made money after 2008’s downturn or 2018s mini-bear market.  Otherwise perfectly rational people see loss, however tem­porary, as enduring failure.
     Loss aversion theory has repeatedly demonstrated that we hate losses ap­proximately 2.5 times as much as we like gains.  That is, investors feel 2.5 times worse about losing $100 than they would feel good about gaining $100.   This behav­ior leads to poor choices like panic selling, unwise market timing and (gasp) ignoring financial advice. 
     Data shows how investors continually make these mistakes and hurt themselves in the long run.  Fidelity recently reported a spike in outflows for stock mutual funds between October and December of last year.  After a few painful months, investors sold to stop the pain, only to watch markets recover quickly in the New Year.  Thus, many so-called long-term investors made short- term decisions in order to avoid losses...only to miss out on the gains.  You don’t need color vision to under­stand how that hurts over the long term.  The proof is right there in black and white.

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Photo: Bing.com, Free to share and use
Links & Sources:
1.https://www.verywellmind.com/what-is-the-trichromatic-theory-of-color-vision-2795831
2.https://www.classicfm.com/composers/gershwin/guides/story-behind-gershwins-rhapsody-blue/
3.Fidelity Charitable: 2019 Charitable Planning Forecast, page 11, “The Public Sold the Low, Again.”
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Patrick Huey is the author of two books:  "History Lessons for the Modern Investor" and "the Seven Pillars of (Financial) Wisdom"; this is considered an outside business activity for Patrick Huey and is separate and apart from his activities as an investment advisor representative with Dynamic Wealth Advisors.  The material contained in these books are the current opinions of the author, Patrick Huey but not necessarily those of Dynamic Wealth Advisors.   The opinions expressed in these books are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. They are intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed in these books is no guarantee of future results.  As always please remember investing involves risk and possible loss of principal capital. 
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