Has the Buffet Rule Morphed Into the Sealy® Rule?

What happens when everything you thought you knew has been turned on its head? This is a question many ask themselves. However very few do this in their lives without a crisis.

For many when a crisis hits their lives will change forever on how they perceive risk going forward. While many more will never engage again in anything they now perceive as risky. Doesn’t matter how much money, time, roses or more is promised. They can’t or won’t be convinced otherwise. It’s the human condition.

If you watch the financial media of late you’ll notice one over arching theme regurgitated: “People will realize they need to get into the market rather than stay in cash.” That axiom might have been applicable before 2008, however that no longer exists as a truth for those with any net worth whether nearing retirement, or since retired.

Regardless of how the intellectual argument is made. After a crisis such as a market meltdown intellectual arguments are crushed by overwhelming emotional feelings of self-preservation. Let me explain.

I was fortunate to have grown up and lived with my Great Grandparents, and Great Aunt whom went through the Great Depression while they were in their middle ages. Their stories and perspectives are more relevant to me today than when I was younger. The reason is I am now of an age where I can interpret their stories with far greater understanding. One prominent fact I remember vividly to this day was: They never – ever – put money in a bank again. Ever! (Did I mention never?)

I lost them in the 1990’s when they themselves were well into their 90’s, and still no bank accounts. You think they were the only ones? I’ll bet dollars to doughnuts most reading this have similar memories of family members whom went through that crisis. It was a seminal event that no intellectual argument one could muster would change their minds. I believe we are at such a place today.

Say what you will about the markets. One thing has been constant which baffles most so-called “experts.” The higher the market climbs – the more money flows out – not in. Here is why I believe my hypothesis of what is taking place today will not change for possibly a generation.

The market we know of today prospered and was held aloft with the combined yearly contributions to 401k’s and more from a generation of baby boomers over the last few decades. The financial crisis of ’08 I contend effected their viewpoints about wealth and markets far greater and more severely than any Gen X, Y, Z, or other understands.

You’ll hear the argument on making money as per a percentage on this or that ad nauseam. Sure it makes sense intellectually. Just as the so-called “Buy and Hold” strategy can be touted to anyone under 30 as “See…See..Buy and Hold!” But that rings on deaf ears if you were close to retirement or retired in 2008.

Here’s what most know instinctively regardless of any financial planners investment diatribe: (These numbers are examples for context only.)

If in 2007 your balance of investments within your 401k had a value of $1 million dollars and you were close to retirement or retired – you were very content. Life was good.

So many could (and did) easily justify purchasing that new retirement home that was twice the size of the one they raised 4 kids in previously. After all, it was just the two of them now. Just as easy was taking out another 30 year mortgage for it while simultaneously using that new home as an ATM to purchase the new luxury car, SUV, and boat to fill the even larger attached garage. It was a great time to retire, and only looked like it was going to get better. It was the stuff dreams are made of. Almost too good to be true.

Then in 2008 not only did many lose those yearly percentage gains or dividend checks, but many lost 50 – 60 – 70 percent of those same investments. The new home in some places lost more than 50% within months of signing the dotted lines. Gas for the car, and SUV not only doubled but forget about using the boat. If you think it was expensive to drive you never had a boat.

This catastrophe in financial wealth all happened within 1 year. Not only did most have no idea on what to do. Even more unsettling was neither did their so-called “financial planning experts.”

Quicker than they signed on dotted lines to live the dream of retirement it all turned and became the nightmare on the cul-de-sac. Don’t underestimate the power and frightening affect the speed of what happened took on them. It may seem like ancient past for some, but for the ones in this category. It’s as clear and real as today. Forget about yesterday.

For the ones whom panicked and pulled whatever they could out at the bottom of the crisis they are gone and never coming back. Very few if any that stayed in will ever contribute again in amounts or percentages equal to levels prior the crisis. While many more have moved on with their lives in what ever fashion and will never trust or look at markets again.

This is a generational shift that not only was lived, but will be taught to their children, and grandchildren. And that is why I believe one can truly say: It’s different this time.

It’s different because it follows the real. Not the imagined or the hoped. Which when it comes to markets, “It’s different this time” is usually used to explain Unicorn and rainbow thinking. Rather than reality which is where I believe the term is relevant.

The ones that didn’t get out for what ever the reason. (They were too scared, or just didn’t know any other option so they just threw their hands up and stayed in.) in my opinion are causing the phenom we are seeing today. The one that makes all the “guru’s” scratch their heads. The higher we go – the more they want out.

It’s not that difficult to figure out if you think about it based on emotion rather than intellectual thinking. And is far more relevant to understanding what is taking place. Again the opinion on why is mine. However the phenom is not. People are leaving in droves.

If you’re one of the people described above this is what you know: In 2007 you had $1 million dollars. In 2008-09 you lost half if not more, and forget about making anything as far as dividends or interest. If you had $50K worth of yearly overhead you had 10 years at best before you were destitute.

If the market is now back to where you have your million back (or let’s say break even.) Your mentality is: “Phew! I’ll take the cash now thank you.” Because no matter what happens in the market. Your rationale is that you would have 20 years with the cash in your hands today. And that “kitchen table” math is far more important and relevant than anything – and I mean anything some financial planner is going to say. Especially if that planner appears to be no more than 28 and uses the term “Boo-ya” as an investing term.

If the commonly referenced Buffet rule is “Don’t lose the money.” Than I believe this new investing strategy is more akin to what I coined, “The Sealy® rule.” aka putting the money under the mattress. Both rules follow the most prudent rule of solvency.

Which is by far the most important investment strategy out there.

© 2012 Mark St.Cyr