Lessons Learned From a Basement
I started working from home late last week, for the first time in my career, and little did I know I’d go on an incredible journey in just a few days. When we look back at this time period it will be with awe, sadness, incredulity, and solemn reverence. The things we are learning about ourselves and the World will forever shape the rest of our lives. Let me pass to you a few of the lessons I’ve learned on a laptop in my new basement “office.”
- You have to pick a side in life. Big picture…long term….you are either an optimist or a pessimist. A helper or a complainer. A bull or a bear. In extraordinary circumstances it’s important to define who you are so you can get to work. The first question you should ask yourself is this: Will humanity win, will we persevere over this virus? Only after answering that can you move onto other decisions. I believe we will, I’m an optimist, and I will be a helper to my firm and our clients EVEN as I acknowledge the challenges we face right now (a bit of realism).
- Make your move and sleep at night. Investing, for as complicated as it can be, is all about you and your own time horizon, no one else’s. What you see in the news and on TV is someone else’s game so why do you care? Studies have shown people with advisors do better in times like these than people who go it alone. Why? For a multitude of reasons but mostly because they have someone alongside them to remind them that their game, their home field, is what matters. That their actions, right here during March of 2020, will determine their success at reaching cherished goals.
- Look at your results and recalibrate if something is wrong. You want to know how diversified portfolios are doing thru the worst selloff since the Great Depression? They’re doing fine. My friend Ben Carlson looked at their performance on March 23. A 50/50 Stock Bond portfolio (on March 23) was down 15% YTD. A 100% stock was down 30.8%. This is the WHOLE POINT of a well-diversified portfolio. If you look at your allocation and you can’t stomach it then you’ve learned about your risk tolerance. You need to have “impatient money” and “patient money”. Impatient money should be used in the here and now, cash to meet short term needs, while patient is set to ride out storms. Don’t mix the two (this is a failure of a great many investors)
- Focus on what you can control. Here is what’s under my control A) My family’s safety and staying at home B) What I do to support my teammates, our advisors, and their clients C) my attitude D) staying in touch with people I love E) Keeping my spirits up. You know what’s not in my control? The market, the virus, people who are constantly negative, what the government does, or when the Olympics happen. Fear and negativity is as infectious as COVID 19, don’t let it penetrate you. It’s OK to acknowledge how scary this is but focus on what you can control.
- What my son eats. I swear there are not enough snacks in the World to satiate my 14 year old boy. He’s a remorseless eating machine plowing thru Doritos like Homer Simpson through donuts.
- The World will be different on the other side. Lots of things will change, some for the better. Watching a first run movie at home is amazing, doing conference calls on Zoom is seamless, drinking coffee in my kitchen and going to work in my sweatpants is liberating to my creativity (I hope my bosses allow sweat pants when we all go back to our desks). Some of Newton’s most profound discoveries happened during the Bubonic Plague, we could see incredible things happen in the next few years.
- Local Business matters. The stock market will survive, big companies like AAPL, AMZN, WMT will be fine, but your local business might not survive. I promise you that the valuations on your favorite restaurant or bar are attractive, support them so they don’t fall into an abyss. They are the heartbeat of our nation, don’t forget them.
- Every crisis has heroes, this will be no different. There will be stories told of the heroism of Doctors, Nurses, and Medical professionals that will rival anything you’ve ever read. God look over them, bless them, and keep them safe.
- Regular jobs have HUGE importance. Grocery stores, retail workers, pharmacists, the list goes on and on. They might not be super star athletes or movie stars but their importance to our society is immeasurable. Thank you.
- Laughter is a huge part of life, even in Finance. Find someone who makes you smile and hold onto them with both hands. Human beings can only take so much serious investment commentary, I try to balance markets with a sense of humor and I hope it shows. Follow smart people, read good commentary, but don’t drown in technicals.
Let me end with a quote from my one of my favorite books of all time. The message is timeless and I want you to take it to heart. Read it a few times and let it wash over you.
Frodo: "I wish the ring had never come to me, I wish none of this had happened"
Gandalf: "So do all who live to see such times, but that is not for them to decide. All we have to decide is what to do with the time that is given to us"
J.R.R. Tolkien - The Lord of the Rings
When Will The Market Bottom?
Since this question is on literally everyone’s minds right now I wanted to talk through what I think that scenario might look like.
First and foremost, there is no answer to “when” the market will bottom. It might be this week, next week, or even longer. We are shutting down entire economies at once with no firm idea of when we will spin them up again. The past 11 bear markets have taken an average of 15 months to find a bottom. If you are buying right now there’s no guarantee the market won’t go lower and lower and lower but you know what? That’s always the case. Volatility is going to be heightened for awhile, expect gigantic daily moves. After the crash of ‘87 the market bounced 15% in two days, then re-tested the low 33 days later. Every bottom is different, this one will be too. What matters right now is your risk tolerance and your investing horizon not someone else’s. Hyper focus on yourself not what you see in the news.
The Fed cut rates to zero and decided to re-engage QE to the tune of $700B. What was the markets response? More of the same, a halt down 7% and then down 12% immediately after that (as I write this we are back to “only” being down 6%). The question you might be wondering is this: “why didn’t that make stocks go up?” “It worked in the Global Financial crisis didn’t it…why not here”? The problem my friends is that world, the world of a “Fed put,” was left behind mere weeks ago. This is a medical world now not a financial world. Their intention isn’t to make stocks go up or to cure the virus, they are doing this to make sure the financial system functions thru this crisis. That the world’s most liquid market (Treasuries) continues to function and credit markets don’t freeze. The odds of recession are surging (my friends at Strategas put it at 70%) but the Fed is on the front lines fighting and will be for the foreseeable future.
What did I mean by “this is a medical world now?” My personal opinion is that the market will start to bottom when epidemic curves begin to flatten in the Western World. Spain, France, the US, those curves are going to skyrocket as cases are discovered. Italy, which is on full lockdown right now, is further along the curve and releasing epidemic data daily. This is the new Nonfarm Payrolls, the new PMIs, the new Leading Indicators. When their curve begins to flatten we will better understand what quarantine can do to slow the spread of infection. But the data will get worse in the near term as those other nations still aren’t on full lockdown. The bottoming process will be medically driven not Fed driven. In WW2 the stock market bottomed 10 days after the Doolittle Raid (1942). It then rallied as news about the war got better. Same here, only it’s a war against a virus. The financial recovery will begin on the back slope of a curve, not once it’s all clear.
This is a unique crisis, one that will change the World forever, but also one that will teach us what kind of investor we are. It’s ok to do nothing right now, doing nothing is a decision people make all the time. Investing should never be an “all in or all out” situation, it has always been about balancing risk so you can sleep at night. We don’t own stocks for the next minute or hour or day, we own them because we believe life gets better over time. That companies and economies grow through the years even while absorbing incredible shocks like these. Optimism (think bullishness) can take losses in the short term, everyone admits that, but optimism has not taken losses in the long term.
When I left the University of Chicago in 2007 to start my career at Baird I was super excited about the challenges that lay ahead of me. I turned down offers in major NY banks to work for a small midwestern firm and, in hindsight, it was the best decision I’ve ever made (next to taking my wife out on that first date). I started on the trading floor in March of 2007, eager as anyone to build a reputation inside and outside my firm. One year later the world was gripped by a global financial crisis and I earned my stripes helping our clients navigate treacherous waters. I left that role and joined Baird’s Private Wealth division in March of 2019, hoping to bring my unique style centered on behavioral finance to our advisors and their clients. One year later, in March of 2020, the world is gripped by…. Ok, fine, you wanna blame me? I can handle it. I promise next time I debate changing my role I’ll write a blog encouraging you to buy puts. Look, these are serious times, our Superbowl as Josh Brown puts it, but all of us here at Baird are ready. I cut my teeth as a trader in 2008 so let me share with you a few of the things I learned back then.
When will this selloff end? When will the pain stop? No one knows but there are a few things I and my teammates are looking for. Baird’s investment strategy team wants to see the “waterfall decline” cease, as such they are looking for two “10 to 1 up days”. What does that mean in English? They want to see massive volume on the buy side. 10x as many shares bought as sold which generally indicates that the market thinks the worst is behind it. I personally don’t think the market can bottom until it understands how many cases there are in the US which means more testing and seeing the # of confirmed cases rise rapidly. We also got hit in the face with an oil shock as Saudi Arabia decided this was the best time to start a price war. One of the lessons I learned in 2008 is that when things seem bad, they can always get worse, and markets trade on “better or worse” in the very short term. You’ll never call the bottom, don’t try, in fact let me give you an example of someone who didn’t.
On October 16, 2008 Warren Buffett wrote an op-ed in the NYT titled “Buy American. I am”. It was delivered in the midst of the worst storm to hit our markets since the Great Depression. Let me read you a quote from it: “You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.” Look at the date, October 16, 2008, Warren’s buys (and all of ours) would continue to get pummeled for MONTHS. In fact, the S&P500 would go on to drop an additional 29.6% before bottoming.
My friends this is what “buy low, sell high” looks like. You buy and the market goes down, then you buy and it goes down more. But your horizon is sufficiently long enough to put the odds of success in your favor and one day, down the road, you sell high. Warren Buffett, arguably the best investor of all time, reminded us back then what is still relevant today. The people who managed to miss out on all the gains from the 20th century were the one’s who sold when “headlines made them queasy”. I started my son’s 529 account in 2007 and watched it get CUT IN HALF. Imagine having a newborn son, being excited to start saving for his college education, and watching his money get mercilessly destroyed. But I stuck with it, buying low, and lower, and lower, and one day I’ll sell high (hopefully, it’s certainly no guarantee) and it’ll be like 1/10th of the money I need for his education. Ugh.
This is a serious time and it will likely get worse before it gets better. Find smart people to follow, good information to read, an advisor who can guide you, but also remember to find people who make you laugh. Humans need laughter in times like these, its just as important as technical analysis. I spoke at an event last night in Wausau WI and while I told our clients how we view the world I also made an effort to lighten the mood when appropriate and I could see on their faces that they appreciated it. I knew plenty of people in 2008 who were both serious and had a great sense of humor, which was crucial in the darkest hours. All of them are still in this industry helping their clients today.
This is our time to shine, all of us at Baird, and we won’t let our clients down.
A Front Row Seat To History
Location: 3052 N Sheffield Ave, Chicago IL
Date: October 14, 2003
Time: 8th Inning
Score: Cubs 3 Marlins 0
I remember every single thing that happened in that moment. My wife and I were watching the Cubs potentially secure their first NL Pennant since the end of WWII. The smell of the beer, the phone call from my friend Bill congratulating us, the fact that we were up 3-0 with only 6 outs to go, the cool crisp October weather, our plan to run up to Wrigley and celebrate with all of Chicago (we lived .7 of a mile away). Then it all came undone as Moises Alou reached for a foul ball along the 3rd base line. A guy in a Cubs hat reached up (like any of us would’ve) and the rest is history. After the game was over I laid on my Ikea couch in the basement of my cookie cutter condo marinating in misery. I knew that I had just bore witness to a moment I (and the whole sports world) would never forget. The Bartman Game as it would come to be known is etched in my mind forever.
What you and I have seen over the past week and a half will be written about in history books. This moment, this event, will stand out on charts and in historical studies for all eternity. Here are a few things that have happened 1) The fastest 10% correction from a peak ever. 2) The fastest drop from a 52wk high to a 52wk low ever (S&P500) 3) AAPL’s dividend yield being HIGHER than the 10yr US Treasury yield 4) Macau gaming revenues dropping 88% in February 5) Chinese Services PMI falling below 30 6) People lining up at Costco to buy enough hand sanitizer to clean a garbage truck 7) an emergency Fed Rate cut. The Coronavirus outbreak is the first true global scare in the Social Media Age and it is teaching us SO much about ourselves.
It is 100% ok to acknowledge that you are human, that headlines surrounding this event have been nerve wracking and made you feel uneasy, but the actions you take right now (and in other turbulent times) will mostly determine your success as an investor. Whatever you decide to do will have a direct impact on your goals. I heard Future Mike whispering to me a few days ago: “Bro, you don’t need your retirement money for 20+ years, there has never been a 20-year period in history where stocks have been negative. Go about your daily life, wash your hands, stop touching your face, and keep saving. Also, our kids are still on our cell phone plan, cut them off at 25”.
If you still find yourself wanting to make changes to your investing strategy then this event has taught you a great deal about your risk appetite. You either need guidance from a professional or you just need to hold less equities. If you own a 100% equity portfolio you should go into it knowing that the max drawdown (since 1976) has been 50%. If you adjust to 40% Stocks 60% Bonds the max drawdown falls to 19% (remember these are historic averages). Even if you go 100% Bonds the max drawdown is still 12%! Investing IS RISKY but that’s why stocks return what they do.
You have a front row seat to not only a unique event in human history but to your own story. I promise you there will ALWAYS be a reason to sell stocks, there will always be a reason to be afraid, if it’s not Coronavirus it will be something else. Remember: what you see in front of you is not permanent just like the Civil War wasn’t or the Spanish Flu of 1918 wasn’t. Bad times seem like they’ll last forever but they don’t, and good times DWARF the bad times.
Don’t lose your sense of optimism about the future, as Andy Dufresne said to Red: “Hope is a good thing, maybe the best of things, and no good thing ever dies.”
It's Ok To Be Human
“Hey, are you guys seeing this?” I walked out of my office yesterday to talk to a few of my coworkers about the market/headlines because when the tape is melting down I find human interaction much more enjoyable than Twitter. “Crazy right?” said Sean. “Wow,” said Eric. “Is it close to a bottom?” asked Ryan. I proceeded to wander down the hall to talk to a few portfolio managers. “We’re studying our shopping list,” said Katie. “This kind of stuff can happen,” said Kris. I ended the journey in my friend Ellen’s office where she yelled at me that I touch my face too much (something the CDC warned me to stop doing).
The S&P500 is down over 13% this week in what is the fastest 10% correction in history. 6 days…it took 6 days for the market to plummet from its top sparked by fears of a spreading pandemic. I scoured the internet for every single take on this move in the media, Twitter, blogs, and podcasts. I have consumed charts showing the long term gains in the stock market, how compounding is the key to success, and how corrections like this happen all the time. I even spoke with my advisor about my plan and how its behaving. But you know what? Even armed with all that knowledge and advice I think it’s still okay to say “wow, this is rough.”
We use percentages all the time in this industry, but moves like we’ve seen this week are felt in dollars. Losing 13% in 6 sessions seems innocuous but losing $130,000 seems real. We are living breathing things with a brain that produces all kinds of hormones, we do not exist on an Excel spreadsheet and we are not wired to ignore emotions. If the news and the market move this week wore you out then guess what? You’re a human being just like the rest of us.
I polled a dozen of our advisors and asked them, “did you get more calls this week?” Some said yes, most said no, and not a single one of them said their clients felt panicky. Look, it’s easy to feel smart in a bull market, to sit in an index fund that only goes up. It becomes really hard when your human brain kicks in as the market drops like a stone. If this entire episode has you paralyzed, or you just need someone to talk to, reach out TODAY to a professional who can help. Baird has offices all over the country. Here’s a link.
My friend Conor Sen tweeted this today; “You can play path or destination but not both. Path over the next 3-6 months is unknowable so better to focus on the latter.” He’s right. What could anyone possibly know about the next few months of a potential pandemic? I don’t care what their charts or indicators say. One of the best minds on Finance Twitter, Morgan Housel, said, “There are only 3 edges in investing 1) you can be smarter than everyone else 2) you can be luckier than everyone else or 3) you can be more patient than everyone else.” What’s your edge right here, right now?