Lahars

Dan Ferris - Fri 19 Dec, 2003

"...Imagine driving up to your house, walking around to your backyard, and looking into a hole that is so wide you can't see the other side of it, five times as deep as the Empire State Building is tall..."

Imagine driving up to your house, walking around to your backyard, and looking into a hole that is so wide you can't see the other side of it, five times as deep as the Empire State Building is tall.

That's how visiting the Grand Canyon felt to me, when I first saw it 15 years ago. I got out of my car, walked over to the edge, and suddenly I was looking 500 stories down. It dwarfs us all right. It makes us realise how far down into the earth's crust you can go before it starts getting hot.

Erosion did all this...amazing...or at least, I'd always heard that the Grand Canyon was the product of millions of years of erosion.

Turns out, it probably isn't, though. The other day, I heard that geologists say the Grand Canyon wasn't cut out of the desert floor by rivers eroding it for millions of years. Instead, they believe it happened very quickly. Hearing this immediately made sense to me, although I'm not exactly sure why. Maybe it was simply that I like it when the popular view is wrong.

The event that many geologists believe created the Grand Canyon is known as a "lahar". A "lahar" occurs when massive flash flooding sends tons of boulders rushing downward. One lahar can wreak more destruction than millions of years of erosion.

I'd forgotten about that odd sensation of staring down into a hole in the world's floor that was one mile deep and miles and miles wide. Until I heard about lahars. I think we should use that word more. It applies to all kinds of things besides canyons.

What about market lahars? That's what happened in 2000. The Tech Stock Canyon of 2000-02 took the Nasdaq index from 5,048 in March 2000, down to 1,108 in September 2002.

People who held on to their Nasdaq stocks when it fell apart for three years still aren't anywhere near where they were in March 2000. They'll never get their money back. They're living in the Grand Canyon. And they're unlikely to return to the top again. The Nasdaq lahar cut through their stockbroker accounts and its effects still overshadow anything that has happened since.

Terminal illnesses and injuries can be personal health lahars. My own personal health lahar happened in 2002, when I had a second operation on my back. The pain in my right leg was absolutely intolerable. Morphine barely took the edge off. So I felt I had no choice, as much as I loathed the idea of them cutting into me again.

Today, I live free of all that horrible pain. But I'll never be the same. My right foot and areas on my right leg are still numb to this day. My leg muscles are as tight as piano wire, too. Lying flat on the floor, I can barely raise either leg 45 degrees off the ground. I can't really run or do anything vertically jarring because I never know when another disc will give out on me. I used to run 10 miles every day when I was in my 20s. Now I walk the dog around the block and I'm done. I'm only 42.

The first time I injured my back several years ago, I'd just made a bunch of money on gold stocks. I quit my job, cashed out my gold stocks, and decided that I was going to compete in the Guitar Foundation of America's International Guitar Competition. I started practicing several hours a day, seven days a week. My friends heard me play, and said, "Wow. You've really been practising. You sound incredible." I felt light. I ran up and down the hills of Fell's Point in Baltimore, Maryland, travelling to and from various guitar gigs and parties.

The lightness lasted three weeks. Then, I herniated the L5/S1 disc in my lower back, and that was the end of my career as a classical guitarist. That's how I came to study and write about investments every day instead. A lahar changed everything, and I had to change what I did and who I was. I couldn't play guitar anymore, and I'd run out of money from my gold stock investing days.

I wasn't sure what to do about my back. But I decided that no lahar was ever going to cut deeply into my wallet ever again. I believe that the only way to keep such grand events from destroying your wealth is to insist upon a margin of safety in every investment you make.

Money...health...only if you're really lucky do you lose these things gradually and in small increments, over long periods of time. Being really smart helps, but is not required. What's more usual, in my experience, is that you lose them in single, painful life-changing swoops. Lahars.

I remember the first thing I ever did as an investor. I had graduated from college with a music degree, so naturally I was working as a waiter for a living. I worked constantly, always taking over-time whenever it was available. I saved up $4,700 in cash. That was more money than I'd ever had in one place at one time.

I bought a brand new, handmade classical guitar from a guitar maker in Seattle, Washington named Mark Stanley. I still have it. He did quite a job on it. He even dyed the wood and made the rosette around the sound hole himself. No one ever does that. That cost me $2,700. With the remaining $2,000, I opened a commodity futures trading account.

Six months later, I closed the account. My broker sent me what was left: a check for $286 and change.

As with all lahars, I was never the same after that. For about a year afterward, anytime anyone talked to me about investing, I either clammed up or shouted him down. I wasn't much fun, but I eventually got over it - and learned from it.

Lahars pull everything right out from under you. And it always feels like they take much more than you deserve to lose. Of course, as Clint Eastwood said in the film, Unforgiven, "Deserve's got nuthin' to do with it."

That's how people felt in September 2002, when the stock market was in its third straight down year. That's how I felt after my last back surgery. That's how I felt when I lost 86% of my money trading futures.

My greatest fear for my neighbours, and for you and for anyone is that many, many people are going to have that feeling of sudden, severe loss, some time in the next couple of years. The stock market rally of the past year has them forgetting that they're still more than 50% in the hole. I can understand that. I often forget that I have no sensation in my right foot.

Then I bang it on the end of a chair, and instead of feeling horrible pain, it just throbs lightly. Then I remember that I can't really use it the way I used to. And that I probably never will be able to again.

Investors today are like losers at a roulette wheel. They started with $10,000. They were up $100,000 in early 2000. They lost $99,000. Now they've got $2,000 and they're feeling pretty good again. Hey, they've doubled their money. That's good, isn't it?

I don't know what it is that's going to cause most investors to lose and lose big, but I am confident that it will come. That's what I've learned. That's how life works. You either plan for such cataclysms, or you get run over by them, usually just when you're feeling most confident.

That, at last, is what's different about money and health, as opposed to geology. You can prepare for what lies ahead. You can ask yourself what you'll do if the money in your pocket loses all its value, or if your house loses half its value - and you can take measures to protect yourself.

Those things might not happen, but something like them will.

Yours,
Dan Ferris

P.S. Today I do yoga and stretching for my back and practice extreme ‘Value Investing’ for my money. Those are the answers I've found. It took me years of pain and suffering to find them. I've often thought lately that I probably wouldn't trust them as the answers to my two biggest life challenges if they hadn't required years of pain to find them. But they did.

And it's because they were the result of "life lahars," geologic events that changed the shape of my life's landscape, that I have confidence in them. They were born of trials. They're the result of my greatest losses.

All you can do in this world is prepare for the worst and do your best. That's what I try to do. That's what I think you should do, too.