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The Bannon Lesson in Consequences

by on March 19, 2017 5:00 AM

Michael Bender, a writer for the Wall Street Journal, recently wrote a piece on the Bannon family and some of the experiences that galvanized their economic thinking and that may well be shaping current national economic policies. Steve Bannon is the controversial White House strategist and advisor to President Trump. Steve’s father, Marty Bannon, was a 50-year employee of venerable AT&T and built a sizeable nest egg in that company’s stock.

Apparently, his entire portfolio was concentrated in this one investment and, for a time, the performance of the company served him well. Aside from his personal residence, his entire investment portfolio was invested in AT&T*.

The measure of a good investment advisor is not the good returns gained in good markets, but providing the emotional underpinnings that help prevent investors from reacting to events emotionally or irrationally.  

Unfortunately for Marty Bannon, he had no such assistance. As the traumatic events of 2008 unfolded in the markets and stock prices plunged, Marty Bannon flipped between financial television channels, panicked, and did the unthinkable: he sold his entire portfolio near the bottom of the market, convinced that the end of the investment world was at hand.  

Indeed for some companies the end of the game had arrived, such as Lehman Brothers, General Motors. However, AT&T recovered and has performed rather well since, recovering much of its recession decline. Marty Bannon pursued the safety and security of a large, well-known and well-positioned communication company that had thrived over many decades. But in the end, the investment markets tested his resolve in his beloved AT&T and he sold his entire holding.

While many look at this experience through the eyes of what went wrong in the economy and the markets, none of that analysis would have helped Marty Bannon to save his nest egg. He made several major investment mistakes that ultimately led to his sour investment experience. Had he sought the assistance of a competent investment professional, he might have had a different outcome.  

So, what investment principles or theories were relevant for Marty Bannon? Here is how I see it:

1. Concentration: If you don’t control the investment, don’t concentrate all your holdings in one stock. Diversification of holdings across industries and markets (foreign and domestic) can provide a great deal of comfort when markets are crashing. Marty should have had 12 to 15 different holdings and should have held a significant part of his portfolio in bonds as he was 87-years-old when the market crash occurred. The bond market held up rather well in this decline.

2. Trading emotionally: Marty had no one to talk to during the crisis except the television, apparently, and so was totally swept away by the emotion of the moment. Of course he had it all on the line as he only had one holding and this led to more emotional charge than might have been the case if he had been properly diversified.

3. Marty apparently misunderstood the distinction between the company (that he worked for) and the price of its stock. Stock prices are not determined by the company, but by other investors. All stock prices are determined solely by what someone else is willing to bid for its shares. From time to time, investment valuations can get extremely high or extremely low based on the technical operations of the markets and can be completely unrelated to the soundness of the company.

4. Finally, if the author of the article is correct, Marty blamed everyone else except himself for his decision to sell. Sure, a lot was going on in government and in the investment markets worldwide. Yet the appropriate response to all the circumstances lies not in assigning blame, but in looking inward and determining how he might have weathered the storm to the recession and market decline with a better outcome.

Hopefully the Bannon family has gotten a lot smarter as a result of their investment experience. Ultimately, investors have to play the hands they are given, even when they involve insider trading, overregulation, government overreach, product-pushing commissioned sales people and charlatans of all sorts. Good investment management will allow most investors to find their way through this maze successfully.

While winning is never guaranteed when you are investing, if you have money beyond your day-to-day living expenses, you are an investor. You don’t have a choice. The only choice you have is to participate. If you don’t participate you cannot win.

*Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.



Dan Nestlerode was previously the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. He retired in 2015 after 50 years in the investment business. A graduate of Penn State University, Nestlerode became an investment advisor in 1965. He can be reached at danielj@nestlerode.com.
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