May 23, 2018

The Tale of Jozef Gozanski and Investment Advice for Current Times

May 23, 2018
Mark R. Gordon — JD, MPP, CFP®, CFA
Chief Investment Officer & Chief Compliance Officer
Jozef Gozanski entered this world during great turmoil. He was born in Polish-speaking Russia in 1915, near the start of World War I. The next five years saw the continuation and end of the Great War, the reemergence of an independent Poland, and a massive reordering of people across Europe. During this time, Eastern Europe endured the Russian Civil War, the Polish-Soviet War and the Polish-Ukrainian War. In each of these conflicts, ethnic majorities attacked minority communities. The attacks prompted international concern and, ultimately, sections of the Versailles Treaty protecting ethnic minorities.

Jozef lived in Bielsk Podlaski, a town in north-eastern Poland. Bielsk Podlaski, like much of Poland, had a vibrant and growing Jewish minority as Jews emigrated from Ukraine and Soviet Russia in large numbers. In 1921, when Jozef was six, Poland officially recognized its Jewish community by providing in a new constitution that Jews should have the same rights and freedoms as other Polish minorities. For Jozef, it was a good time to be a Jewish boy in Poland.

The good times didn’t last. Jozef grew up in an atmosphere of increasing anti-Semitism. The large influx of Jews led to ethnic and political backlash. Many Poles resented the Jews and what they perceived was a refusal to assimilate into Polish culture. Indeed Jozef, like many Jews at the time, lived in a primarily Jewish shtetl. He spoke Yiddish, ate different food and observed a different religion than most Poles. As the 1920s wore on, anti-Jewish sentiment helped fuel aggressive anti-immigrant and nationalist political movements.

In 1929, at the age of 14, Jozef left Poland for the United States. He picked an excellent time to go. Over the next several years, discrimination and violence against Jews escalated in Poland. Jozef was able to avoid restrictive quotas at universities, exclusion from government jobs, discriminatory welfare policies, and, ultimately, Nazi occupation.

When Jozef arrived in the United States, he adopted the surname Gordon. He chose Gordon because it belonged to the wealthiest family he knew. He figured he might mistakenly inherit some money (he didn’t). He also understood that, although other Jews might recognize the name as Jewish, most people would assume he was of Scottish or English stock. If the United States didn’t turn out as hospitable as Jozef hoped, the right last name might save him and his family.

That is how Jozef Gozanski became Joe Gordon. I knew him as Grandpa Joe.

My grandfather’s story lives within me. At an age when I still played Dungeons and Dragons, he left his home and community and crossed an ocean – alone – to avoid religious discrimination and seek a better life. Although I haven’t lived under a discriminatory or autocratic regime, I feel especially sensitive to government policy and community sentiment that isolates or targets minorities.

Thus I’ve felt something between concern and alarm regarding recent developments in our national politics. Last year I saw a major-party candidate run a successful presidential campaign based in part on ethnic resentment. Our president has already tried to institute a thinly veiled travel ban amounting to religious discrimination. He has suggested publishing a list of crimes committed by immigrants. Each of these speaks to something deep within me; on occasion, I wonder whether I and my family will need to repeat my grandfather’s journey.

Since the election, some clients have expressed uncertainly or fear regarding the direction of the president and his administration. Some mention the divisive language and policy. Others question his lack of policy expertise and volatile demeanor. They say the administration projects neither a coherent agenda nor governing competence. Most often, after sharing their feelings, clients tell me they’re worried something bad might happen and ask whether I understand.

Yes. More than you know.

And yet.

And yet I recognize our feelings should not dictate how we advise our clients. We all have our perspectives, biases and triggers. It’s vital for both advisors and clients to separate emotions and political beliefs from financial decisions. Despite my feeling state, I know that 2017 United States isn’t remotely like 1937 Poland. Moreover, many of my fellow citizens (and clients) disagree with me and feel bullish on the new administration.

I vividly recall, from just a few years ago, questions regarding what potential disasters might occur under a new Obama administration: hyperinflation, dollar debasement, corporate flight, market crashes, or war. These worries prompted some to make dramatic changes in their investments, such as: staying out of equities, loading up on gold and oil, and selling bonds. But none of those fears materialized. People who allowed fear or political ideology to drive their investment decisions may have compromised their long-term financial plans.

But what if things really are different and something bad happens? As we’ve noted before, on average the US stock market experiences an intra-year drop of 14%, in good times and bad. So when clients ask whether we think the market could go down 10% in the near future, our answer is typically “absolutely”.

Some clients express concern regarding more than “normal” market volatility. The current bull market dates back to 2009. What if we’re really at the end? Or what if something unexpected causes global markets to plunge?

This chart from the Wall Street Journal, shows each US bear market (a decline of 20% or more from peak to trough) since 1929 and the length of time it took to recover. The declines can be sharp and rapid when they occur, but, on average, it took less than 3 ½ years to go from peak to trough and back to peak. Those 3 ½ years can feel unsettling but, as the second chart shows, it’s important to remember the markets have always recovered, regardless of the source of the crisis.

[Note the Journal chart includes dividends received and the impact of inflation or deflation. For example, stock prices took longer than 8 years to recover from the 1929 crash. But if we include all dividends received and lower consumer prices due to deflation, an investor “got her money back” in terms of purchasing power in just over 7 years.]

One thing jumps off the chart: we’ve had a lot of bear markets – 28 in 88 years, one every three years. Yet it’s been almost 6 years since the last one. Does this mean we’re “due” for another? No and yes. No, because we believe today’s stock prices bear reasonable relation to expected corporate profits (no pun intended). Yes, because bear markets are common and a part of investing life.

That’s why we focus on how to prepare for, and react to, a bear market. We believe the best way to prepare for a downturn is to diversify. A mix of global stocks, bonds, and cash remains an excellent way to help blunt the impact of a bear market. Moreover, disciplined rebalancing can help take advantage of a market swoon by forcing us to buy equities at lower prices. If you have any concerns regarding today’s environment we would like to hear them and help you address them so you feel prepared.

Rather than try to predict the future, we’d prefer to prepare ourselves for the inevitable bad times and react accordingly when they occur.

I’d like to think Jozef would have approved.

Originally Published April 2017.