It’s not the risk you see: A grown-up fable for our timeAdvantageVoice® Blog—
John Manley, CFA, Chief Equity Strategist
Risk is a slippery thing. It is always anticipatory, and it is always inchoate. Once risk becomes manifest, it is then damage, and we all know what damage is.
The odd thing to me is that the perception of risk is not always accurate. The perception of risk can induce caution, and that caution may actually decrease risk. Ignorance of risk may encourage behavior that a wiser, better-informed individual would be unlikely to undertake.
I will give you an example: Two people are walking separately along a narrow winding path. It is a dark and stormy night (I’ve always wanted to write that) with no moon and little illumination. On both sides of the path are 200-foot cliffs that plunge to the rocks below. Now, for the difference: Our first walker (whom we will call Wary Walker) knows that the cliffs are at the path’s edges; our second walker (Happy Walker) has absolutely no idea of any danger.
If you were to ask the Walker brothers about their perceptions of risk, Wary would almost certainly say that he was being very cautious given the risk he perceives. Happy, on the other hand, might be a little nervous being out on such a foul night and might take normal precautions but no more than usual.
So, Wary is wary and Happy, if not exactly happy, is blissfully unconcerned. Wary would tell you that his actions are risky; Happy would say that he feels reasonably safe. Yet we, third-party observers who know both the lay of the land and the mindsets of the individuals, know that it is poor Happy who is truly at greater risk. Wary is probably moving slowly, checking his every footfall. He knows it is dangerous out there. With no pun intended, he is taking steps to protect himself. His risk is probably much less than he perceives. Poor Happy is doing no such thing. He is at the edge and doesn’t know it. I would say that his risk of falling is much greater than Wary’s.
The point of the story is obvious. Like Wary, equity investors have been keenly aware of the risk of falling off the edge for more than four years. They had fallen, and when they finally got up, they proceeded with the caution of those who intimately and viscerally know how much a fall could hurt. What a contrast to the psychology of the late 1990s, the Age of Happy! Back then, the perceived risk was not that of falling but, rather, of missing all of the wonderful things you could encounter on the path.
I continue to believe that we investors are all still acting and thinking like Wary. We are easily reminded of the risks that always surround us. We are ready to pull back sharply at the slightest provocation and then move forward slowly as we heave another shallow sigh of relief. The nasty little corrections that corresponded to worries about Syria, tapering, and now the budget ceiling may have numbed some of our risk sensors, but the fear is still there, under the surface.
As I see it, that fear should keep us and the equity market on the right path for some time. I would use any weakness in stocks occasioned by earnings worries to add to positions. And, whatever you do, don’t get too (much like) Happy.
The views expressed are as of 10-28-13 and are those of Chief Equity Strategist John Manley, CFA, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.