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February 2019
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President's Corner
President's Corner
The Boston Red Sox were leading the Los Angeles Dodgers two games to one going into Game 4 of the 2018 World Series. Dodger Game 4 starter Rich Hill threw six shutout innings, and the Red Sox looked completely outmatched, down 4-0 as the game advanced to the seventh inning. With one out and a Red Sox runner on first base, Dodger manager Dave Roberts jogged to the mound to review strategy with Hill, whose back was turned when his boss was approaching him. Hill assumed he was being taken out of the game and handed the ball to Roberts before any discussion. In order to make sure Hill saved face, Roberts had little choice but to bring in his relief pitcher. The Sox hit a three-run homer in the seventh, another one in the eighth, scored four additional runs in the ninth to win Game 4, and handily won Game 5 to capture the Series.

Hill misinterpreted Roberts’ intentions, Roberts did not want to embarrass Hill, and the result was failure. This type of miscommunication happens in business multiple times daily, whether it is between two people or one person talking to thousands. Apple CEO Tim Cook announced earlier this year that it was projected to miss revenue expectations after selling fewer phones than it had expected, particularly in China. Cook’s statement caused an immediate panic, the stock price plummeting 9% in the first few hours of trading.

All companies have business cycles. Every company has had, or will have, a decline in income. As Mr. Cook explained to investors, “We can’t change macroeconomic conditions, but we are undertaking and accelerating other initiatives to improve our results.” Panicky traders only heard the part about China instead of what Apple will do to improve.

Stock volatility has unintended consequences. Small investors lose money because the institutional investors only heard, or wanted to hear, some of Mr. Cook’s comments. There is the unfortunate situation that investors who trade on bad news or opinions dressed up as news hurt pension funds and long-term investments.

Some small investors insist on holding individual stocks. This is the riskiest type of investing. If one stock goes bad, the entire portfolio is adversely affected because those investors cannot possibly build a portfolio that would adequately reduce that risk.

Ironically, Jack Bogle died last month. Mr. Bogle founded the Vanguard Group, the largest mutual fund family in the world. He believed a mutual fund could operate with low fees (just like your Credit Union!) and offer a higher return to investors. The point is a mutual fund manager looks more long-term and can diversify a portfolio better than most investors, and such diversification reduces volatility while maintaining a competitive return on investment.

If Rich Hill had read his manager’s intentions better, would the Dodgers have won the World Series?  No one knows, but one thing is certain. There is very little margin for error in baseball and in investing, especially as we get older. The key to both is effective communication and active listening.

David M. Green

President/CEO
dgreen@1stnorcalcu.org
(925) 335-3802
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