The Noise of Wall Street

I’ve had a little tinnitus for years now. It seems to be more noticeable in my left ear, but if I concentrate I can “hear” it in both. It can be maddening if all I do is focus on it, especially when trying to sleep. But I usually don’t pay attention to it. It’s just part of all the other background noise of my life. Even though it is much more noticeable when there is less sound around me, I still yearn for quiet. I believe the brain can do some amazing things when given the opportunity to have some alone time, though today that is hard to come by. It seems that noise surrounds us all constantly.

We get such little quiet in our lives. This morning I woke up at 4:30 AM. The televisions in the house were all in stand-by mode, and the cats had yet to begin their morning begging for food routine. Still, the hum of the heater, the cars and trucks on the interstate about a mile away, and the constant, far-off roar of the jetliners heading to and from Charlotte Douglas International Airport were all more than enough to keep my tinnitus in check. But still, that very early morning time is a treat when it comes to finding a quiet vacation for my brain.

There aren’t many spots on the planet where you can fully escape from man-made sound. The BBC writer, Racher Nuwer, wrote an article about her own quest to discover quiet places, titled “The last place on Earth without human noise.” In it she mentions a more in-depth search by NYU professor George Foy, who shared his challenge to find silence from the sounds of mankind in Zero Decibels. A quick summary of their findings is… there really aren’t any spots left that you can fully escape the drone of humanity, but there are still some quieter places that are far removed from cities.

What does all this obsession with silence have to do with investing? Well, as you may have noticed, both from the news and our reports to you, last year was another excellent year for stock markets. However, as countless articles have also related, it was an unsettling year for investors. It was a relentless battlefield between warring “thematic” investment camps – Growth vs. Value, Small-cap vs. Large-cap, Growth vs. Income, Tech vs. All Comers, IPOs vs. Cryptocurrencies vs. NFTs vs. SPACs vs. Virtual Real Estate… Each battle was short and furious, with rocketing champions and forgotten casualties who replaced each other on a monthly, weekly, and sometimes daily basis. Each camp had their own armies of experts telling you, the investor, what to buy, sell, and replace. They were not taking prisoners.

That, as many of you know, is the “noise” of Wall Street. We’ve talked about that particular noise in many a letter, and it is a major part of the study of Behavioral Finance. The noise of Wall Street makes it hard to be a successful investor because of how hard it is on our emotions. It involves both the opinions of people we see as experts, talking about a subject many of us know only a little about, as well as the behavior of and powerful influence of the “crowd.” The noise of Wall Street is basically like the peer pressure they warn you about in primary education, and it can be just as hard on adults as it is on kids.

Well, the investment strategy that I believe worked so well last year was noise cancellation. In our portfolios, we started with quality companies who are large and powerful. These companies are important to the lives of everyday people, and they believe in taking care of their shareholders, as well as in conservatively caring for their company balance sheets and watching their debt burdens. We started with these types of companies, then held them, and spent the rest of our efforts cancelling out the noise. If you focused on the investment community peer pressure, you were pulled in every direction. I can easily understand how an investor without a plan and guidance could have felt adrift in such a loud and volatile environment.

This is also a big part of what being a “contrarian” investor is. It is not simply taking the other side of an investment, such as shorting a specific company when everyone else is buying. Being a contrarian involves having the resolve to stand alone against the television, newspapers, friends, and family who all at the same time agree the only worthwhile investment is their investment.

Dad’s prior letters had countless references to some of the greatest books on investing and to some of history’s greatest investors. When I find the need to add a little reinforcement to my own thoughts in a letter, I only have to walk as far as Dad’s office, where there are bookshelves filled with gems on our subject. That is the case this time as well. Michael Lewis is an investor who started his career at Salomon Brothers, one of the biggest underwriters of corporate bonds and U.S. treasury dealers before being acquired by Citigroup in 1998. Mr. Lewis’s book, Liar’s Poker: Rising Through the Wreckage on Wall Street, gives a very honest accounting of the behavior of money hungry brokers and investment bankers in the 1980s. It is a very entertaining read, but a quick warning here, it is also rather frank with colorful language. Here’s what Mr. Lewis says about being a contrarian investor –

Everyone wants to be, but no one is, for the sad reason that most investors are scared of looking foolish. Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are, strangely enough, happy to stand on the edge of a precipice as long as they are joined by a few thousand others…

Last year required us to not get pulled into the volatile hype caused by all the noise, including noise about possible tax changes from our warring two-party system in Washington, or trying to be first in line during a record year for new company stock issuance. No one knows what this year will bring. The primary concern of investors, large and small, for 2022 is inflation. I talked about inflation on and off last year, and as I’ve explained, it should always be a concern of any investment strategy or philosophy, as it affects returns. I will again say that there simply are no proven investment strategies to protect against inflation. However… large, quality companies who are able to raise prices to protect profit margins, have historically raised their dividends paid to owners, and have a history of reducing total shares outstanding through share repurchases, provide a very powerful defense in protecting your personal purchasing power. Protecting the purchasing power of your savings will always be a major goal for our clients, and we believe our style of investment provides a valuable edge towards achieving that goal.

The team at Anderson Griggs all wish you the best for the new year.

Justin T. Anderson