What You Can Learn About the Stock Market From Our Poorly Trained and Excitable Dog

If you want to take volatility out of your portfolio, check it less often.  –Ronald H. Muhlenkamp, American investor and businessman

I am not a “dog person.”  I didn’t grow up with dogs and as an adult I didn’t have any desire to own one.  My wife, Alice, and I agreed on this.  However, we didn’t want to let our indifference to dogs punish our children, so many years ago, after a very persuasive letter from our eldest daughter, Kelsey, we broke down and let her have a dog.

Having given in once we couldn’t very well deny the younger girls the same opportunity when they started asking.   Not that we didn’t try.  We didn’t give up without a fight.  In fact, I tried every method of saying no I could think of.  A couple of my favorites were the Captain Barbossa method from Pirates of the Caribbean: “I am disinclined to acquiesce to your request;” and the snarky, sarcastic “The short answer is no.  The long answer is nooooooooooo.”  

My daughters just didn’t seem to get the message.  We held out as long as we could but they were relentless and we eventually relented.  That is how one day several years ago my wife and daughters came home from the pound with a poorly trained, excitable chocolate lab/cocker spaniel mix named Coco.

After we had had Coco for a couple of years our middle daughter, Shannon, decided she didn’t like the name Coco anymore, so she started calling him Steve.  I figured that would last a couple of days but that was several years ago and he is still Steve to her. 

Our youngest daughter, Savannah, refuses to call him Steve.  He will always be Coco to her.  The rest of us call him the first name that comes to mind, some of which cannot be printed, so now we have a poorly trained, excitable, and confused chocolate lab/cocker spaniel mix named Coco/Steve.

Over the years Coco/Steve has become a part of the fabric of our family.  My daughters absolutely adore him and Alice and I put up with him.  I have to admit I get a little jealous at times of all the attention he gets from my girls.  To save my self-esteem I started pretending that all the lavish praise and compliments they give the dog are instead directed at me.  When I do this they just look at me like I’m crazy.  It was particularly difficult when Shannon moved away to college last fall and she had a much harder time saying goodbye to Coco/Steve than to us. 

Taking Coco/Steve for a Walk

Overall Coco/Steve has turned into a pretty good dog but he has never mastered the art of going for a walk.  Nearly every day one of my daughters will attempt to take him for a walk and it is always an adventure.  It would be comical to watch if I didn’t feel so sorry for them. 

One minute he is straining at the leash, pulling them forward.  It is all they can do to hold him back.  The next minute he is darting to the left or right, distracted by a bird, bug, or butterfly.  Then he completely reverses direction to chase a passing car or bike before lurching forward again, wrapping his leash around their legs and almost tripping them.  Then he will suddenly stop dead in his tracks and refuse to move.  Sometimes you can pin a cause to his erratic movements but often there is no apparent reason for his random changes of speed and direction.  It is utterly impossible to predict what he will do next.

However, if you stepped back and looked at the bigger picture you would notice that my daughters almost always take Coco/Steve to a park a couple of blocks from our house, play for a few minutes, and then return home.  This has been going on for several years now.  While there are often mishaps and adventures along the way, and the course is definitely not straight, so far both dog and daughters have always made it to the park and back safely.

Coco/Steve and the Stock Market

There are some remarkable similarities between Coco/Steve going for a walk and the stock market.  Both of them are erratic in the short-term but much more predictable when you look at the big picture.  If you focus on the short-term the stock market appears to be unpredictable and extremely dangerous.  You can drive yourself crazy trying to figure out why it did what it did, and what it will do next.  However, if you look at longer time periods the stock market has consistently gone up more than “safer,” less volatile investments.  This doesn’t mean this will always hold true.  History doesn’t provide any guarantees for the future, but it is the best we have to go on. 

As long as you focus on the short-term movements of the market you will see stocks as a very risky investment and you will tend to avoid them.  This was confirmed in a study done by Richard Thaler and Shlomo Bernartzi.  They showed individuals the historical returns of stocks and bonds.  One group was shown yearly returns while the other group was shown the same returns reported over periods of 5, 10, and 20 years. 

The groups were then asked to allocate their investments between stocks and bonds.  The group that saw the yearly returns allocated a much smaller percentage to stocks than the group that was only allowed to see the bigger picture.  The short-term volatility of stocks, even over periods of a year, scared them off.  If they had seen daily returns they undoubtedly would have invested even less in stocks.    

The lesson from this study is clear.  Stop focusing on short-term volatility and step back and look at the big picture.  My daughters can’t ignore Coco/Steve’s unpredictable manner but you can choose to ignore the short-term movements of the stock market.  It won’t be easy but doing so will lead to less stress, better investment results, and a better understanding of the risks and rewards of investing in stocks.