The Circle Game

What can Joni Mitchell teach about investing?

40 years ago Joni Mitchell wrote “The Circle Game,” a lyrical song about a young man’s gradual coming of age. The most memorable part is the refrain, which goes: “We can’t return, we can only look behind from where we came / and go round and round and round in a circle game.”

Circles and cycles are part of investing. The economy cycles through growth and recession every 4 to 8 years; businesses magnify any economic decline into a significant profit downturn; and investors take those business losses and run with them, bolting for the exits en masse and causing market panics in the process.

The economy doesn’t decline that much because we all need to eat, sleep, and heat our homes no matter what our mood. Corporate leaders can’t be too moody, either. They need measure their firms’ progress and manage by the numbers, not their feelings. But there are no checks on the swings of investor psychology. Investors are the classic manic-depressives—alternately crazily bullish and depressingly despondent—driving prices along with them. So most investment risk doesn’t come from the economy or the business cycle, but from investor psychology. And that’s where Joni Mitchell comes in.

For four years we’ve heard the gloom-crew tell us to get off the train, batten down the hatches, and look out below. But four years of successively higher highs and higher lows have the bears in retreat. The painted ponies are moving around the carousel from depressive to manic. Because the returns on “safe” investments are so low, people are moving out the risk curve to preserve their income. And so it’s time for a little caution.

Because what the wise do in the beginning, fools do in the end. Four years ago it was wise to go against the flow and bet on a recovery. It wasn’t easy. But those bets have paid out in spades. Taking a little money off the table now will be equally difficult. But the alternative—another circle game—could be worse.

Douglas R. Tengdin, CFA

Chief Investment Officer

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