A casual chat about music and Behavioral Finance by Michael Antonelli and John Taft.
Mike: John, do you love Yacht Rock and all the smooth, silky songs from the late 70s, early 80s?
John:What the heck is Yacht Rock?
Mike: Well my friend, Yacht Rock isn't an official musical term so there's no strict definition of what qualifies. It is generally defined as the kind of music that everyone would love hearing if they were out with friends on a boat and the sun was setting and warm breezes were wafting over you as you sipped on cool, crisp chardonnay. (IGN did a decent job explaining it in this article, click here). The kind of songs that come to mind are classics like "Sailing" by Christopher Cross, or "Brandy" by Looking Glass, or the quintessential Yacht Rock song "What a Fool Believes" by Michael McDonald.
Michael McDonald was a legend in the late 70s, early 80s and is the undisputed king of Yacht Rock. Between his work with the Doobie Brothers and his solo performances McDonald has come to epitomize a time when music wasn't produced on a computer, it was hand crafted in studios and jam sessions and enjoyed on tapes and records everywhere.
John: I'm not a big sailor. And I don't particularly like chardonnay. And I can't figure out what your love of mellow elevator songs from the late 70s has to do with me? Or, for that matter, with the markets, investing and behavioral finance, which is supposed to be the topic of these blogs.
Mike: Allow me to tie this together for you. "What a Fool Believes" is not only a top 10 song of ALL TIME, it also describes a number of things individual investors should remember in turbulent times like these.
A fool believes they can time the market: You've seen these stats a million times but if you missed the best 25 days from 1990 to 2018 your return would look no different than that of a 5 yr Treasury bond. Time in the market is better than timing the market. You can't do it. Don't even try.
A fool believes that daily noise matters: I promise you there's an inverse correlation between time spent watching financial news and your investment performance. On a day to day basis, the market is a coin flip to be positive or negative but, as you extend the time horizon, the odds of success move in your favor. Try not to get distracted by noisy headlines and a daily drumbeat of TV "experts" who know nothing about your personal goals and risk tolerance.
A fool believes it's easy to go it alone: Bull markets make everyone feel like an investing genius, you can make bad decisions and the market bails you out. The past ten years have been some of the best in history and while no one knows what the future holds, having someone by your side if things get rough will be extremely valuable.
John: I'm starting to tack with the breeze (to use a sailing term). Here are two things investors should remember:
A fool believes they can get to where they want to go without a map. Disciplined financial planning is the key to identifying and achieving one's lifetime goals. As the saying goes, "If you don't know where you're going, any path will get you there."
A fool believes added returns come without added risk. In this low-interest-rate environment, it's easy to be tempted by the prospect of 7% of 8% yields. Just remember, those kinds of returns are likely to come with substantially higher risks, particularly at a time when stocks and bonds are fully valued.
Mike: Let me hit you with one more before we dock this boat.
A fool believes that investing is more important than personal finance (inspired by my friend Morgan Housel): Control what you can control. In fact obsess over it. You can control your savings and spending but you cannot control what the stock market does. Like my blogging partner said, don't chase risk in the market. Instead focus on your side of the equation where you can get immense leverage. Don't neglect the things you have DIRECT control over.
Well John, I hope my love of Yacht Rock convinced you to give it a go. Not only does the music inspire me but there's lessons to be learned from its lyrics because "it's not far down to paradise, at least it's not for me. If the wind is right you can sail away, find serenity".
If you enjoyed the conversation, you should check out Mike and John's discussion about the most important question Baird's wealth management clients ask.
You can follow John's Blog "Finance for the Greater Good" here: https://johntaft.rwbaird.com/
There are certain things in life that frustrate me to no end. Someone writing a check at the supermarket. The Chicago Bears. When I’m in an elevator and 6 people push 6 different buttons. That table in a coffee shop where people make up their drink and spend two hours tasting and mixing and tasting and mixing and I JUST WANT THE CREAM. Wait, where was I going with this? Oh yea, things that frustrate me. Those 4 are certainly high on my list but you know what else is way up there? Sideways markets. The S&P500 has basically gone nowhere for over a year now and all along the way we’ve tried to craft narratives explaining why it’s doing what it’s doing. Trade Wars, Brexit, Asia, Politics. But here’s the thing, those narratives are pointless, stock markets love to frustrate the maximum amount of people they can and holy cow are they succeeding.
If someone were to ask me “which way are people positioned right now: for the market to rise 20% or fall 20%” I’d probably say the latter based on sentiment and positioning (check this tweet). I wonder….does the question need a third option? For the past year we’ve been stuck in neutral because growth has slowed to a crawl. Earnings growth, economic growth, my IQ growth, all of them are at idle speed and thus so is the market. There are hints that things are getting better (action in banks) but also signs of concern (action in software names). However, the US consumer is still consuming and that, more than anything else, keeps me in the optimistic camp. Has consumption slowed? Probably, there’s no doubt this endless Trade War has bled from businesses confidence into consumer confidence, but it hasn’t yet reached a tipping point. Baird’s strategy team still isn’t concerned about an imminent recession primarily for that reason.
You know what being stuck in neutral reminds me about? That “time in the market” is better than “timing the market”. If you thought you could jump in and out of the market (you can’t) you’d be selling what looks like break downs and buying what looks like breakouts all while missing dividends and interrupting compounding unnecessarily. Dividends are a HUGE part of total return and if you’re jumping in and out you aren’t getting them. Look, this could go on for years, this doesn’t have to resolve itself on some arbitrary timeline. From 1976 to early 1980 the S&P500 went literally nowhere which is why sticking to a mediocre plan is better than a complex one you bail on because you think its not doing enough. Sideways…it’s not just a movie anymore!
- If the global economy is so bad what’s up with stocks? “If you’re more focused on the headlines than on price itself, you may have been missing this trend”.
- Good luck trying to time the market: “But the most overlooked challenge with market timing is that it requires you to make two correct decisions: You must get out at the right time—and you need to know when to get back in.”
- Ben is pondering 9 questions including this: “Is this one of the most challenging investing environments ever?”
- Jack O Lantern stuffed peppers! I love me some Halloween food
- If that’s a hotel, Im going there
- You need a cool Halloween costume but you aren’t very creative? Just go here
- Not a fan of Grandfather clocks but I’d buy this one
- Good comments here bv Cullen including “do you need Gold if this all comes crashing down”
- Legend says the car is still falling to this day
- I think I’m going to wander around my floor putting random inspirational quotes on people’s white boards.
So I’ll admit I love the Tube in London. I don’t mind the heat and cramped quarters especially when I can get a front row seat to a live concert! I mean who among us HASN’T wanted to belt out those lyrics? WHOA OH…..
Have a good night
The Best Month
There’s one immutable fact about our calendar: October is the best month. There is no argument here, don’t even try to email me about this take, it is the best month by far. The front half of it is usually warm, the back half is crisp, leaves are turning into spectacular colors, and it ends with the best holiday of the year (yea I said it. Halloween). Apparently the stock market didn’t get the message though because holy cow what a mess. The first two days have seen the S&P500 fall roughly 3% which is the worst start to the month in over a decade. Does this mean we’re going to experience a repeat of last years disastrous drop into the Christmas Eve massacre? I doubt it, primarily because the Fed is easing not tightening. Last year was a toxic brew of a growth scare + Fed hikes and right now we only have half of that in our cauldron. On Monday I said that the stock market was holding its ground primarily because consumer data remains firm. Today we saw ISM Services whiff and you don’t have to be a CMT to notice the downtrend. This bears watching, it really does, if other consumer data like spending, jobs, and residential investment falters then it’s entirely possible that uncertainty around this Trade War has bled from businesses into consumers. Speaking of consumers, lemme give you my take on what “free commissions” might mean to our world.
The biggest news this week was that discount brokerages like E-Trade, Schwab, and TD Ameritrade were cutting their equity trading commission to 0. Free, no cost, you can wing yourself into and outta stocks online for absolutely nothing (startup Robinhood has allowed their customers to do this for a while now). Now there’s a case to be made that this is a golden age for retail investors, the frictional costs of investing for mom and pop are approaching 0. But here’s what the data shows about them: most do-it-yourself investors struggle to match the overall performance of the stock market. Now there’s lots of reasons why but they mostly revolve around overreacting to noise, trying to time the market, and letting emotions sway decisions. They see something they think is important, fear and greed kicks in, they make a rash decision, and all of a sudden they are chasing the market around. Behavioral stuff. Now if there’s no transaction costs they might be MORE inclined to do this. In fact, I wonder how much “free commission” will end up costing retail investors?
Honestly, I think this will only increase the value of advice/having an advisor. A great many investors will STILL fail at reaching their goals even with zero frictional costs. They are only human, they have biases and emotions literally working 24/7 against their investing success. Yes, advisors charge fees, but part of their value lies in helping clients overcome those investing traps and tackling those behavioral biases which might get WORSE now. Remember, the value of advice is different than the value to transact, don’t conflate the two. Good advice, and frankly a good partner who understands you and your values, will always be needed even in a world of $0 transactions.
Ok, apologies, I went a bit long today so I’m just going to skip to my big finish:
Tell me if you saw these guys performing this act on the street you wouldn’t give them at LEAST $20? Absolutely amazing
Have a good night
One of my biggest pet peeves is the notion that markets will some day have “certainty.” I’d argue that “I’m waiting for clarity before making a decision” is actually the worst thing someone can say if they work/invest in the stock market. Awful, embarrassing to hear, people pay advisors and analysts to make tough decisions when things seem crazy because that’s the whole point. You will never have clarity, things will never settle down, uncertainty is and always will be present because if it wasn’t stocks would never move. As we end the month of September I want you to remember one thing about our current level of uncertainty: this market is 1st, 2nd, and last about global trade and monetary policy. It is not about politics or anything else, it’s about how the interconnected economies of the world are responding to a spat between two gigantic trading partners. If you’re a fan of watching intraday price action like I am you’ll notice that headlines regarding trade are still leading the market around by its nose. When that changes I’ll let you know, but until then don’t confuse noisy headlines with what investors really cares about.
So what do smart investors really care about other than trying to figure out how to get to this beach? They care about the fact that the U.S. economy continues to muddle thru driven by a consumer that remains somewhat resilient. Is manufacturing and business/CEO confidence weak? Absolutely, but what else would you expect from a global Trade War? The biggest risk remains some kind of policy error (Trade War spirals out of control, Fed doesn’t act, etc) that finally cracks that resiliency. That being said, the consumer is still consuming, they are still buying New Homes, they still have jobs, and their balance sheets are quite good. Recall that 70% of our economy is driven by YOU (sorry to my pals reading this abroad) so that’s what we’re watching for signs of weakness. Can anyone predict a recession by just watching consumer data? Of course not, no one can predict anything at all, but why do you think the market has remained so steadfast (I love that word) in the face of all this horrendous economic data? Also why are Pumpkin Spice Lattes so popular? They’re awful.
Lemme say one last thing about politics (how many people have ended their career saying that?). Politics is extremely noisy with almost no signal. The market cares about POLICIES not politics, that’s what we want to be thinking about. Remember the rally in 2017/2018? Happened on the back of de-regulation and a tax cut which boosted corporate earnings. To the extent that we might see fewer market friendly policies in the future that MIGHT have an impact on the investing landscape. MIGHT. Again, nothing is certain (other than October being the best month of the year), but that’s what stocks focus on. Look, I know it’s challenging to divorce your political views from your market forecasts but you absolutely must do so because strongly held beliefs can be toxic to investment returns. These are big complex entities we deal in, don’t make the mistake of over emphasizing the wrong things, headline related volatility and uncertainty will always be a part of this world.
- Short Investing Beliefs by Morgan Housel. I loved this: “History > forecasts, because most investing history is how people reacted to forecasts and things that weren’t forecasted”
- Market returns can be crazy and inconsistent: “Sometimes returns are front-loaded, sometimes they’re back-loaded and sometimes they’re not great, even over longer time frames. The past 10 years or so have been great for anyone invested in U.S. stocks. The previous decade was crap. The two decades before that were unbelievable. The decade before that was not fun. I could continue. One period of inconsistent or poor returns isn’t a reason to give up on the stock market. That’s how it works”.
- How did I not think of this? A self-driving garbage can? Sign me up
- Blair has it right here: “Fear is a necessary part of long-term investing, unfortunately. If there were no reasons to be fearful, there would be no opportunity to earn the market risk premium”
- Sweaty palms just thinking about this
- Now that’s a living room…
- Don’t confuse activity with achievement. Harsh but fair words here…
- Don’t confuse Kraft Mac n Cheese with this Mac N Cheese. This one is LEGIT
Oh man I love this video so much, there’s nothing better than seeing the joy of youth. It makes me laugh and smile at the same time, make sure you have sound!! (the kid on the 50 cracks me up)
Have a good night
Equities start the day higher as…whoa boy….so much is happening. Last week was absolutely goat rodeo bonkers insane as tweets came flying in from all directions whipping the market around like a 6-year-old on a Tilt a Whirl. It is impossible to handicap what the market is thinking given how fast the narrative is changing. Futures were down last night because the United States ratcheted up tariffs on China yet when I walked in the door futures were up because of a tweet. Ok, I mean is it too much to ask for all of this not to happen live on Twitter.com (if you aren’t on TWTR I don’t even know what to say anymore). Let’s put all of that aside for a moment and try to ground ourselves in a few facts. Last week saw all of the following: Initial Jobless Claims fall (still near cycle lows), New Home Sales print a new cycle high (after June was revised), $TGT release incredible consumer based earnings (might I remind you their stores are within 10 miles of 80% of Americans), and Leading Indicators print a new cycle high. There’s still good news to be had here, it’s not all doom and gloom, LEIs and New Home Sales peak well before a recession begins and they just printed new cycle highs. However, think of our economy as a boxer, it can take a lot of punishment until it can’t anymore. The biggest threat to the expansion is a policy mistake, i.e. things just go a little too far with the Trade War and consumer/business confidence, which is as fragile as my ego, shatters. We don’t know which punch will knock the boxer down but we do know that less punches would help keep us on our feet.
All things considered it was a fairly quiet day as the market basically went sideways from the open. Luckily for us that sideways was in green territory led by Tech, Staples, and Financials. Headline Durable Goods beat expectations as did Dallas Fed and if you were to wander over to the Citigroup Economic Surprise Index you’d notice its had a heck of a run lately (economic data is beating expectations). That being said August has been CRAZY because Tariff and Trade War madness is leading us around like we’re on a leash. Winners: FTI, DISH, HAS, DE, UPS, and AMGN. Losers PM, LB, GPS, ADS, and DD. There’s no way this works right? Also how often are you using a ladder on flat pavement with tons of room in both directions? I’m short this thing.
We closed on the highs of the session, 2,878, up 1.1% so at least there’s that! To be honest if I had to put a reason on the market rallying today it would be 1) we were due for a bounce after Fridays drubbing and 2) there were no new tweets? Here’s the thing, I think the entire World agrees that trade with China needs to be addressed, it really boils down to “how” we address it, that’s what has the market spooked. The US economy has weathered a great many storms over its existence and you could argue it is STILL weathering the current one. The real question is how long the winds of trade blow and what their final tally will be. Only history will tell us but know that we’re diligently watching the anemometer here at Baird (never in a million years did I think I could work that word into a recap. BOOM).
Final Score: Dow +1%, S&P500 +1.1%, Nasdaq +1.3%, Rusk +1.1%
- Dear Millennials, if you are worried about something like this PLEASE come talk to us. I for one think the headline ridiculous: “The trade war is dragging on. The yield curve is inverting. Investors are fleeing to safety. Global growth is slowing. The stock market is dipping. The Millennials are screwed.”
- Speaking of being scared, your boy wrote about Recessions and what you can do now
- Your boy also wrote about Modern Day Wealth Management! Come let me tell you about Sisters Oregon…
- “There are two ways that risk can ruin you: by taking way too much of it or taking way too little. The sooner you can properly calibrate your true risk tolerance, the better off you’ll be” - Great stuff from Batnick
- Good 2Q earnings update here from Urban. Its thick with macro so dive in!
- New Trailer for SW Episode 9! Let’s goooo!! (also Dark Rey? Yes please)
- The MBA is in trouble… For the second consecutive year, even the highest ranked business schools in the U.S. are beginning to report significant declines in M.B.A. applications and the worse is yet to come, with many M.B.A. programs experiencing double-digit declines.
- I wont lie, this doesn’t look very safe for tourists
- China has some cool pedestrian bridges
- Honey, I can’t take a bath, there’s people staring at me. What is this nonsense?
Tonight I wanted to end on something that made me smile or laugh. This kid right here, makes me smile. Get after it little man!!
Have a good night