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!
Stock Market Lessons from 2020
"We are more often frightened than hurt; and we suffer more from imagination than from reality."
~Lucius Annaeus Seneca
For the longest time I’ve wanted to write down everything I learned so far in 2020 so I could refer back to a blog post when the market inevitably goes haywire again. The problem was I didn’t know how to begin, I needed something to jumpstart my thoughts. Luckily my friend Jim O’Shaughnessy tweeted a wonderful quote from Seneca and I finally had what I needed to get going. Thanks Jim, you’re the best.
It has been said to “never let a good crisis go to waste” so I’m half writing this for you and half for me, I want us both to reflect. Now I’m not saying what we are going through is over, this isn’t reminiscing about a bygone era, I just want to write down what I think is important to remember about this tumultuous time while its fresh in my mind.
So without further ado, let’s take a trek through the past 9 months and see what wisdom we can glean.
1) Your equity exposure should be what you can sleep with at night. Don’t forget how you felt in March of 2020 holding stocks. Read that again before you move on. If you couldn’t sleep then you won’t be able to the next time a selloff happens. Find the right allocation for your specific comfort level and then stick with it. Charlie Munger once said: “The first rule of compounding is to never interrupt it unnecessarily”
2) Time horizons drop to zero in a panic. I’m 46, I have a family, I own stocks for the long term to reach my goals. All I could think of earlier this year was selling them because I couldn’t believe what I was seeing. My investing horizon had dropped to the next minute. You have to fight that and if you can’t, get someone to help you like an advisor. The World breaks all the time, don’t let that fact knock you off your plan.
3) The amount of support for markets / the economy is essentially unlimited. As systemic panic accelerated the Fed backstopped whole sections of the market to prevent a financial crisis from unfolding. The US Government passed a multi trillion-dollar stimulus. When things are coming unglued there’s really no limit to what policy makers can do to shore up the system, it just comes down to political will.
4) The stock market is not the economy, but it kinda is. History will likely view the CARES Act as one of the most important pieces of legislation ever passed. The extra UI benefits and stimulus money got us through a very difficult period. The stock market realized how important that was to consumers and that’s one of the reasons it bounced so fast. Just because economic data looks horrendous doesn’t mean the stock market will reflect that, stocks discount the future not the present.
5) Charts can lose their importance at times. Our industry loves a good chart, it’s a staple of interacting with clients. Technical Analysis can be a valuable part of an investing process. That being said, it’s very difficult to stop someone from making a potentially catastrophic decision, in the midst of an overwhelmingly scary situation, with just a chart. Reduce complexity and increase empathy when fear rules the day.
6) Stock Market “Outlooks” are impossible to get right. Strategists often give “market outlooks” to start a year, they are typically snapshots of what has happened and what they expect to unfold over the coming year. If I told you in my 2020 Outlook that we’d see a Global Pandemic, social unrest, and a stock market crash you’d probably want to spend the whole year in cash. As I write this the S&P500 is up 5% YTD. Even if you had every single piece of information on January 1st about what would unfold you’d still have trouble making money off it. This is one of the reasons I dedicated my professional life to the study of Behavioral Finance. Your behavior in a panic is PARAMOUNT to your success.
7) We should study history but realize that it’s not a guide to the Future. In the GFC stocks fell 55% from their highs. I remember telling someone “it fell 50% back in 2007, why wouldn’t it this time, this seems worse”. Stocks bottomed down 33% this year. Look to the past for context but realize what you’re going through is always unique.
8) Market Structure matters…a lot. The top 5 stocks in the S&P500 are AAPL, AMZN, FB, GOOG, and MSFT. They represent 21% of the weight of the entire index and they are arguably amongst the most successful companies in history. Whatever you’re expecting the overall market to do, you need to consider how those 5 will act.
9) Companies (and by proxy their stock price) can adapt to difficult situations RAPIDLY. Baird basically pivoted a multibillion-dollar financial services firm to all remote work in less than a month with little to no impact on our customers. There are numerous companies who actually grew and took share through the worst of the Pandemic. Good leaders know how to adapt their businesses quickly to changing conditions and the stock market rewards that. This was not the case for every company but it was for some, next time look for them.
10) Find someone to talk to when things go haywire. I had lived and worked through the GFC but I didn’t know how to process a Global Pandemic. I found a few new friends on Twitter, Doug Boneparth and Conor Sen, and talked to them when things were really hectic. They were in different parts of the country and had different viewpoints and our interactions kept me going. Don’t go at it alone. Lean on your friends, family, advisor, colleagues when you need it the most because they will help get you though.
I’ve never seen a year that argued more for “sticking to your plan” than 2020. If you fell asleep, or forgot you owned stocks, from March to August you would’ve shrugged your shoulders and said “what was the fuss about?”
Dwell on the quote I used to start this blog because the wisdom it conveys about our experiences as investors lives through the ages."We are more often frightened than hurt; and we suffer more from imagination than from reality."
There are lessons we learned from the market during this crisis but they pale in comparison to lessons we learned about ourselves.
Investing in Education
As a parent it’s hard to know if your kids are listening to the lessons you teach them. “Hey, put on suncreen or you’ll burn” I said to my 14 year old son. One day later he had a sunburn.
Was I not forceful enough with my advice? Did he just not pay attention to me? Am I teaching the wrong way? Educating a loved one is a never ending task but the better you do it, the higher the odds of success.
Educating people on markets and investing is a million times harder. Each individual comes to the table with a different set of life experiences and thoughts about money. Getting them to use sunscreen would be trivial, giving them the right financial education requires creativity and perserverance.
I ran a poll on Twitter last week and asked the following question:
Ill admit that I didn’t get a massive sample size but, to be honest, I was not shocked by the results. I have this pet theory that, in general, when Wall St tries to educate clients on the stock market and investing it’s often done in a way that’s too complicated and lacking a personal touch. It’s why I have dedicated my career in Baird’s Wealth Management division to behavioral finance and writing in a way that people can understand (and hopefully enjoy).
After seeing the results of this poll I asked 5 advisors inside of Baird to reach out to their clients and ask the following: “Give us 3 words that come to mind when you hear the phrase ‘stock market’ and ‘investing’”. I thought to myself “their answers might tell us whether our efforts to educate them on what really matters is working or not”. Let’s look at what they said.
Since this is a word cloud the larger the word, the more responses we got using that one specific word. The two standouts are “VOLATILE” and “RISKY”, which I think is perfect. On a day to day basis the market is a coin flip to be positive or negative, so it will always appear risky. Over the short run emotions dominate price action, so volatility is something we must all live with.
Notice what’s not in here? Words like “beatable” or “timing”. Things you might see in newsletters that only enrich the author and not the reader, the kind of thinking that might lead an investor astray. I’m super pleased with that.
The rest of the answers show insight into how the advisors are engaging with their clients. “Exciting”, “Unknown”, “Fascinating”, these are all real emotions that fill client’s heads when thinking about the stock market. The advisors likely let them know that it’s ok to be fascinated and excited about something that is ultimately unknowable, curiosity is what makes humans so great. “Growth” and “opportunity” are fantastic words to think about with respect to the stock market because they lead us nicely into the next section….Investing.
I have to tell you, I was super excited with the results of this word cloud. Look at the top 4 and tell me these Baird advisors aren’t doing an amazing job educating their clients.
Investing is about the “FUTURE”, it requires “PATIENCE”, it is super “IMPORTANT”, and it demands “STRATEGIC” thinking. Sprinkled in there is the fact that investing is “long term”, “rewarding”, “complex” and “ever changing”. Someone even used “planful,” which is a nice shoutout to our financial planning teams!
I really want to drill down into “PATIENCE” though because that will always be the key to reaching your goals. There are two things you need to hold in your mind to be successful at stock market investing: 1) the world breaks all the time, the market crashes often, but that 2) doesn’t preclude long term growth. The worst kind of investing mistakes happen when people forget this one word (or they abandon it during volatile moments like March 2020).
Guys, the world really does break all the time, there is never a steady state of complete peace and prosperity where investors have no concerns and just dance through tulips while reaping 20% returns.
Wars, recessions, pandemics, societal unrest, political uncertainty, these are all present throughout human history. You must accept that the World will unravel from time to time but that doesn’t preclude FUTURE long-term growth, the kind you can benefit from as an investor (Long term isn’t 1 year or 3 years, its 10+ years, don’t forget that).
I was so thrilled by the results of this little experiment that I felt compelled to share the answers publicly, and while it looks like I need to continue educating my son on the use of SPF50, I feel like our advisors are doing an awesome job with their clients.
To be clear, education is just one component of the relationship between a client and their advisor, but it can be useful in helping to cut through the overwhelming noise emanating from the market. Without it, investors can become easily distracted.
Every single day Baird advisors are out there helping real people reach their goals, educating them on what’s important, and guiding their plans through an uncertain future. If you feel like you aren’t getting the right kind of education with respect to your money and investing, give us a call.