You've Got Mail
We live in a world where people are bombarded with information daily. It’s been said a typical person consumes more information in 24 hours than someone in the 1800’s did all year long.
That information can be found in the media, on social networks, from their friends, in their email, and on and on. Often the story is troubling, playing on peoples’ fears and positing a worst-case scenario happening. You’ve got mail, and it’s super scary.
“The Dollar is set to implode”
“Hyperinflation is near”
“The Stock Market is going to crash”.
Those headlines demand your attention because someone telling you how bad things might get appears as if they are trying to help, even when that’s usually not the case. Fear inducing statements can be dead wrong for months upon months, with absolutely no loss of reputation. Why?
That's why, because fear sells, and humans always want to know what could go wrong. We are risk averse animals by our very nature, we can’t help it. Pessimism is a seductive message that preys on deep-seated fears about an unknowable future. Tell a person to be afraid of something and you will almost always have their undivided attention.
I spend most of my time harping on the antithesis of that idea, writing (and speaking) about certain themes in markets and investing that I believe lead to success: emphasize good behavior, think long-term, ignore the noise, focus on your plan, listen to an advisor.
Most of these ideas are rooted in optimism because investing for the long-term is akin to betting on the world improving over time. Howard Marks said in his latest memo: "To be a good equity investor, I think you have to be an optimist; certainly, it's no activity for doomsayers."
If one of the best investors of all time says investing is “no activity for doomsayers” why would you let these scary stories impact what you do?
So, dear reader, here is my plea to you before you forward an email to your advisor and say, “this seems bad, should we do something?”
Think about the sender and what their motivations are. Does that person know anything about you? What your hopes and dreams are, what kind of investment strategy you’re using to reach those goals? What is the author selling?
How does that person know what the future will look like (at least any more than anyone else)? How many “worst case scenarios” described in an email or a social media post actually end up happening?
If the World is about to end, and the economy is set to collapse, and we’ll be bartering for food with bottle caps, you have bigger problems than how much Microsoft you own (also that gold is going to be really hard to spend).
The fewer scary stories you read, the less likely you’ll be to look at the market every day, the better off you will be on your pursuit to financial freedom.
Just like you wouldn't take medical advice from an email, don't take financial advice from one. Fear always sells, but you don’t have to buy it.
Now is the time of year when we are bombarded with “outlooks” and “commentary” about what to expect in 2021. It’s natural of course, people are thirsty for guidance in an uncertain world, market outlooks in January are as common as resolutions and usually just as impactful.
In the interest of full disclosure here is what I said, word for word, in January of 2020:
“Growth still positive but slowing. New Home Sales/Employment Growth/Hotels/Vehicle sales all the significant growth is behind us.
Employment is still solid and Household Debt Service is at a record low
Presidential election years since World War II have tended to see stocks struggle early, rally late (after election uncertainty subsides) and finish with an average gain of nearly 7%.”
How did my “outlook” do? Well, the S&P500 ended the year up a little more than 18% after undergoing a macro shock, social unrest, a Presidential election, and market volatility akin to that of the Great Depression. I correctly predicted the market would be up, but, if we use the history of the market, stocks are up more than they are down over any 1-year time frame. Saying “the market will be positive” is a higher probability guess than saying it will fall.
When it comes to outlooks about the economy or the market, what I want you to focus on is not the guess about market direction or performance, but how that person thinks about the World. What is their framework and how adaptable are they to change?
My framework for 2020 was that growth was slowing, but jobs and consumer balance sheets were still supportive of the market. Jobs got nuked in the pandemic, as did the market, but balance sheets were one of the bright spots due to the CARES Act and low rates. When the pandemic hit, I shifted gears to analyzing how the consumer was acting because that’s what the market would focus on.
Remember, you don’t need to know where the market or the economy is going to be a successful investor, that is not a prerequisite for making money. The absolute BEST investors are betting on the long run not the short run, they acknowledge that the World and the economy fall apart from time to time but that doesn’t preclude them from compounding their wealth.
So how am I thinking about 2021 and beyond? Here is my framework:
- Continued bounce in employment and GDP growth from crisis low levels as we inch back towards normalcy.
- Housing remains a considerable tailwind as Millennials trickle into home ownership over the next decade spurred by population migration and low rates.
- Demographics are favorable right now, 80mm millennials are entering the prime of their lives.
- The vaccine will finally reach critical mass sometime around Q2 setting the economy up for potential supernova of growth, 5-8% annually over the next few years, as people absolutely FLOOD out of their homes. I don’t want to get delivery for the next few years and I’d be happy seeing every single Baird branch in person.
- The Fed is still easy and committed to such, do you realize how important that is?
- The potential is there for a “roaring 20s,” I just hope its “roaring” for everyone (and that prohibition doesn’t come back).
How do I think the market will do? Here is my framework:
- I’m finally smart enough to realize that this only a guess, there is no human being on the planet that knows the answer to this question. None, so stop looking for it.
- I think it’s possible the market has discounted a lot of economic growth and we may be asking ourselves “why isn’t the market up more given this surge in activity?”
Dear reader, the kind of stuff that TRULY moves markets, the shocks that represent a real risk to your money, will never be seen in advance. If you are reading about a “worry” in the media, on a blog, or on TWTR, the market knows about it. If you are forwarding an email to your advisor saying “what about this” the market knows about it.
For as much as we talked about the “Trade War” with China how insignificant does that seem now? How about election worries, how did those go? I’d argue in the past 20 years there were only 3 events that posed an outsized risk to your money: 9/11, The GFC, and COVID19. How many of those were on the top of the markets mind when they happened? You get my point.
2021 will be another year on our journey full of ups and downs, success and failure, high points and low points, joy and sorrow. Will there be winners and losers this year? Yep. Will there be exciting sectors and names to invest in? Absolutely, and Baird advisors will help their clients do just that, but 2020 should’ve taught you that having a plan and sticking to it is the most important thing you can do.
Make this the year you commit yourself to being a long-term investor and as my friend Morgan Housel said, stop asking yourself the question “what happens next” and start asking yourself the question “how long can I stay invested for?”
I know it’s en vogue to call 2020 the “worst year ever,” and to count down the days until it’s over, but we are approaching one of my absolute favorite holidays, Thanksgiving. As a child I couldn’t wait until Thanksgiving because I got to see family members who lived across the country, eat as much stuffing as possible, then lay on a couch and watch the Detroit Lions get beat like they do every year. I know this one will look and feel different but that doesn’t change that fact that it’s an amazing holiday.
I wanted to use this space to say what I’m thankful for in the midst of such a tumultuous period. Instead of the usual stuff like family, friends, and the fermentation of crushed grapes, I want to focus on the little things that so often go overlooked. Things like..
- Walks. I’ve never been one for walking other than, you know, to get places. When the stress of 2020 weighed me down I found that a walk would bring me back to a better state of mind.
- Patience, especially in investing. Patience is hard to come by, and I’m saying that as a parent of teenagers. Without it we are prone to making rash decisions or to sabotage ourselves. My friend Ben Carlson said in his latest blog post "Sitting on your hands and not panicking, even when stocks are down big, remains one of the best investment strategies on the planet." The absolute BEST investing strategy in 2020 was simply patience, I’m grateful for re-learning it.
- Creativity in others. One of the ultimate gifts someone can bestow upon the World is to create art. Whether it’s a painting, or a song, or the written word, art makes our lives deeper and richer. Books can transport us to different Worlds, songs can inspire us, and TV shows like “The Queens Gambit” can lift our spirits in trying times.
- My neighborhood. You know what matters more than the city you live in? The neighborhood you live in. 2020 taught me that it better be good because that tiny piece of land (and the people who live in it) can become your entire World.
- Two ply toilet paper. Because we spent a month using one ply…
- Teammates who can adapt quickly. In one week in March my entire team learned how to operate out of our homes while ramping up our creativity and impact to clients. Work is a joy when your teammates are not only adaptable but remain in good spirits along the way.
- A good webcam and microphone. Guess what, we’re probably not going back to previous levels of business travel. Learning how to communicate with clients, the media, or your teammates via online platforms is now a part of your skillset so make sure you look and sound professional.
- Science. We may have just created the first mRNA vaccine in human history and we did it in under a year. I cannot fathom what that means for future pandemics or for how we approach other diseases like cancer. As Morgan Housel says “We have no idea what happens next”
- New friends. There are people I talk to everyday that I have never met in real life. I talk to them about the market, family, life, and I can’t wait to finally meet them because they helped me get through 2020.
- A market crash. Look, I know this sounds really weird, and living through March of this year was one of the worst moments in my professional life, but I am thankful it happened because it taught me a lot about the market, investors, and how to approach my job. You can’t learn the wisdom of markets without living through moments like March, you can’t really say if you’ll panic with your money until you’ve had your feet held to the fire, and you can’t learn to live with fear until you’ve felt it deep inside your mind.
Bonus: Lingering in small moments: You are trying to balance a career, your family, and all the stress of a modern life, but lingering in small moments was everything this year. Reading to your child, a zoom with Grandma, that first sip of coffee, you know when the small moment is happening because you never want it to end.
I know we are still going through a very difficult moment. There has been a tremendous loss of life, jobs, mental health, and youth, but as we approach the end of this year, and look optimistically to a new one, don’t forget to remember the things you are thankful for and to hold close those who matter the most in your life.
The Investors Gambit
There are very few times when I watch something, whether it be a movie or a TV show, and feel compelled to sit down and write about it immediately. I felt that way after finishing The Queens Gambit on Netflix yesterday. The only other time I can remember doing something like this is after seeing Bohemian Rhapsody on a flight home from London. I landed and wrote about my career change at Baird (check it out here). When something is so good and so wonderfully crafted that it inspires you to relay a lesson, you heed the call and start sharing.
The story is about an orphan, Beth Harmon, who has a special gift: she’s an incredible chess player. It follows her from a tragic beginning, through an orphanage where she learns to play from a janitor, into a foster family, and eventually ending up at the pinnacle of her sport. Chess you say? Chess is slow and boring, why would I bother with something like that? You should watch this because it is one of the best TV shows of 2020 and is well directed and well cast, blending the style and flair of Mad Men with a powerful story about the ups and downs of one woman’s chaotic journey.
When I say chaotic journey, I mean it. What Beth goes through includes the death of her family, a nonstop fight with substance abuse, bouncing in and out of relationships, the fact that she is a woman in a male dominated sport, competition with a rival she can’t seem to beat, and a nagging sense that maybe she’s not good enough to be a champion. The struggle is real.
In the end, the journey with Beth is so inspirational that I thought I would share what I think we, as investors, can learn from it.
She is beset on all sides by demons: Her demons include drugs, drinking, failed relationships and a lost mother. She is fighting on all fronts against forces seeking to knock her off a path to success and so are we daily. Someone on TV says “the market might crash”, an article on FB says “here comes hyperinflation,” and the news says “our society is falling apart.” Beth beats her demons by finding inner strength, trusting herself, and relying on friends to see her over the final hurdle. In order to succeed at investing you are going to have to fight against the forces of pessimism daily. Stop listening to them because they are toxic to your goals and you can’t be a champion with them in your life.
Her path to success had many ups and downs. She’s winning, it feels great and we share in her success. She loses, falls into a slump, but how will she ever recover. The stock market will give you a taste of success, then remind you what it means to lose. You won’t know when these will occur or how long each will last, but I promise you that you’ll experience both along the way. There’s no getting around it. Ultimately Beth is an resilient character, even with her flaws. You must be too.
When you are lost, bewildered, uncertain of the path forward, look for signs. One of my absolute favorite parts of this series is when Beth visualizes chess on the ceiling. In the orphanage she did not have a chess board, so she played in her mind. It’s just incredible, the creativity of it is astounding. Find smart people to follow, good books to read and educational podcasts to listen to. The signs are there to lead you down the right path, look for them.
You have to face your rival eventually, what you do to prepare for that will determine your success. Beth has a rival in the chess world, Borgov, a Soviet Grand Master. She prepares for her matches with him by reading books, playing other masters and thinking outside the box. But she struggles because he is a formidable opponent. You know who your biggest rival is in investing? It is yourself and you are a formidable opponent. Your brain is constantly working against you because investing is risky and humans don’t like risky things. You need reassurance that things will be ok and your brain says “nope, things aren’t going to be ok” because dangers lurk. You must face your rival and conquer them in order to reach your goals but I implore you, get help (like Beth did) if you need it.
I could keep going with more lessons but in the interest of your time, I’m going to wrap it up by saying you should really watch this series. It is only seven episodes and it doesn’t require a titanic amount of time to watch.
Investing isn’t easy, just like trying to become a world champion chess player isn’t easy no matter what gifts life bestows upon you.
The Queen’s Gambit is an opening move designed to play a game of chess according to your game plan.
What will be your opening move, middle game, and end game, as you invest? What exactly is your game plan and how do you plan on sticking to it?
Learn from Beth, learn from those willing to help.
Now, let’s play.
Reasons to Sell
Before we begin, I want to welcome you to October, literally the best month of the year. It’s part warm, part crisp, you get to wear fleeces again and eat the most underrated candy bar in the World, 100 Grand, on October 31st. It’s my favorite month of the year with the best holiday of the year (yea I said it).
In my World there are Bulls and Bears, people who think the market is going up and people who think the market is going down. There are even “perma” versions of these names, people who just stick to one viewpoint. I have been, at times, labeled a “perma bull”.
Ok, sure, if that’s what people want to call me because I believe investors should focus on the long term so they can benefit from the growth of our nation and stock market fine, I’ll accept it, call me a “perma bull”. But there are times I think people should sell stocks, where it makes sense to lighten up on risk. This isn’t a definitive list but I think the one’s I mention here make the most sense.
First, let’s ground ourselves in how I think broadly about investing. I believe people should have short term money, in less risky assets, to meet short term liabilities (rent, insurance, food, etc) and long term money, invested in a diversified portfolio, to benefit from long term growth in stocks.
One last thing, this blog post isn’t meant for traders, it’s meant for investors. So…when should people sell assets out of that long-term diversified portfolio?
- When you don’t understand the investment strategy. You don’t understand how the overall investment strategy aligns with your goals, whether it’s the asset allocation or the overall level of risk. In that case I think it can make sense to hit the sell button and start over.
- You’ve reached your goal! Congratulations, you’ve saved enough for that home, or college tuition, or other life goal and you want to pay for it. One of the best feelings in the World.
- You can’t sleep at night. This one is tricky because all investing requires a level of risk. You could sleep at night in all cash but that brings up a whole other possibility, you run out of money as you spend it down. Find the portfolio that helps you reach your goal (accepting that you can’t completely avoid risk) but also allows you to sleep at night when the World inevitably breaks again. This requires tweaking for sure, but that’s where someone like an advisor can help
- It’s time to rebalance. Rebalancing can be a powerful tool to remove emotion from the investing process. Once you decide on a time frame (quarterly, semiannually, annually) stick to it even when it feels wrong. Take a 60/40 portfolio for example, if you chose quarterly rebalancing you would’ve sold some portion of stocks at the end of 2019 after a 31% gain in the broader market (S&P500). If your equity component gets above its target (due to the market going up) rebalancing sells stocks to get you back to your chosen plan.
- It makes sense to replenish that short-term money I spoke about. It is critical for you to have a “safe bucket” to meet your funding needs. You need enough in here to get you through the inevitable and, as history has shown, temporary periods where your growth assets are declining. When it’s advantageous for you to replenish those funds, say in a market rally, that can be a smart time to sell. We all have short term cash needs, be shrewd about when you refill this bucket so you won’t have to (or be forced to) when emotions are running high and the market has gone haywire.
- The investment doesn’t align with who you are and what you believe in. You might be invested in something that, over time, has shown that its values don’t align with your own. It could be a management issue or a public event or maybe you’ve changed your views on a subject. You could consider selling it and using your capital to support something else.
Notice what I didn’t have in here as a “reason to sell”: Someone telling you they are worried about the market, or a billionaire on CNBC acting nervously, or a Bearish prognosticator writing a 2000 word essay on Facebook that the Dollar is about to blow up and the U.S. is in decline. Those kinds of things happen every day.
The best kind of investing is about “not screwing up” over long time frames, letting compounding grow your wealth. When you go to sell an investment ask yourself “why am I interrupting that compounding? Am I doing something that might knock me off reaching a goal?” If you can’t definitively answer “no” find someone to talk to about the decision, why you are doing it and what you hope to accomplish.
Oh, one last thing about October, carving pumpkins is one the greatest creative pleasures in life. Do one with your family this year!