Grading My Actions
As I look back on the past two months of insane markets, I feel both shock and relief at what we’ve been going through. March 2020 was the most volatile month in stock markets history. 2 of the 6 worst days in DJIA history happened in March. We saw the fastest bear market in history and at the low on March 23rd it felt like the wheels were coming off. Looking back on it now it was easily the scariest month I’ve witnessed in my career (and I was an institutional trader through 2008-2009).
Then April followed and proved to be one of the best months in history, a +12.9% gain. Horrendous crash, relief bounce, quite a one-two punch. I wanted to use this space not to talk about why the market fell in March then rose in April but to analyze my own actions during those months. I am a market strategist in Baird’s Private Wealth Division. I spend my entire life embroiled in the ups and downs of markets and investing. I thought it would be interesting to examine what I did as the pandemic rocked global markets because if I’m going to talk to advisors and their clients about investing, I should be willing to share my results and thought process.
To set the stage I am a married 46-year-old with two children ages 14 and 12. My advisor and I have decided on broadly diversified mix of equities and bonds (this is not investment advice, nor is my asset allocation a model for every investor). I’m going to use a chart of the S&P500 as a proxy for when I made my decisions because I have no great benchmark given the complexity of my holdings. When the pandemic got going in March, and the stock market fell, I made the decision to start moving some of the bonds into stocks, essentially upping my equity weight. I made two buys, you can see the area where I made a decision on this chart, and where the market is today (May 7).
How do I grade those two decisions? Hindsight is obviously 20/20 and the first decision now looks early, but stocks had fallen 7% from their highs. A 7% drop in a huge bull market looked attractive to me. Unfortunately, the market started to fall apart as the news worsened. My second buy was early March, down 18% from the highs. Better for sure but still appears early. This was my thinking as market fell – I’m 46, I have decades of time in front of me and I am finally getting a chance to buy at lower prices after a ten year bull market….why would I pass that up?
Then things really came unglued and my nerve to buy stocks evaporated. At the low on March 23rd I could think of nothing but the worst-case scenario unfolding. I was frozen. Everything made me think the market was going even lower, my mind filled with darkness, muttering to myself “I can’t buy here”. I called my advisor so they could bring me back from the ledge, to remind me why I’m investing and why planning is so important to my success.
While I took no action close to the lows, look what happened on March 25, two days after the low.
That’s right, my dividends reinvested like they always do. Dividends can play a significant role in investment returns and, in this instance, they did a better job of buying near the lows than I did though obviously I did get lucky on timing here.
So how did I end up doing? How do I view my actions in hindsight?
First, that may not have been THE bottom, we might retest it or go lower, but for now I want to grade my actions while they are fresh in my mind. I think my first buy was clearly way too early. I didn’t know how bad it could get, I just assumed it would be a temporary blip. The second buy is certainly better but I learned a painful lesson about bear markets, when stocks are in free fall they can accelerate to the downside. The dividend reinvestment reminded me that the automatic portion of my investment plan has no emotions, it just sticks to the plan. If I had to grade myself I’d say B-, what I do know is that I need to work with my advisor on a rules-based plan for how I react to selloffs going forward.
No joke I had my finger over the sell button near the lows, I had seen scary markets before but the added worry about a health crisis rocked me to my core. I remember leaving my basement, walking around outside and thinking about how bad it could get, what I would do, what my family would suffer if the market kept imploding. Thankfully I had an advisor there to remind me one thing: that my plan, my investments, my strategy, is built SPECIFICALLY for me and no one else. He reminded me that “the end of the world isn’t a plannable event, it’s best to think of the most likely outcome rather than the worst case”. What was that? That continuing to be a long-term optimist is true to who I am and my strategy. The key to success, especially with investing, is being able to ride out the inevitable declines.
Investing can be much more emotional than we want and March 2020 reminded me that having someone outside my brain is incredibly valuable. I may not have bought at the absolute low but I honestly don’t care and neither should you. It’s entirely possible that WASN’T the ultimate low, only time will tell. Let me end with this quote by Howard Marks:
“The Investors goal should be to make a large number of good buys, not just a few perfect one’s.”
I didn’t make a few perfect buys, no one does, but that will never be my goal. My goal is to keep making “good buys”, be optimistic about the future, get through scary selloffs when they happen, stick to my investment plan, and allow time and compounding to do its work.
Just Show Up
Amongst all the hectic news and markets I never got a chance to say goodbye to someone special to me and to my teammates at Baird. Paul Purcell, long time CEO and mentor to us all, passed away on February 28 at the age of 73. There have been many amazing tributes to his life and legacy both inside and outside my firm (my friend John Taft wrote a great one here in Barrons) but I wanted to use something he often said to guide us in these turbulent times.
Imagine your CEO emails you and says “hey, can you add me to your blog/daily email?” Ummmm, sure Paul, absolutely, let me just pace around the office for an hour first. While I was incredibly honored I was also a bit nervous, I mean who wouldn’t be, but him reaching out is what’s so amazing about Baird. Every leader, all of them, are super approachable, having him read my content was no different than anyone else because he made it easy between us. Paul was always happy to engage with me, if I sent an email he’d respond instantly. I never wondered if he read it, he’d constantly send me “thank you’s”. When I see our advisors on the road they love to show me where Paul recruited them. “See that table over there, Paul wouldn’t let me leave it until he convinced me Baird was the right place for my business.” They all, to a person, remember every single interaction with him. They also echo something Paul used to say about the key to success: Just Show Up.
It's a simple phrase with profound wisdom. Just show up to work, just show up for your teammates, just show up for your clients, just show up for your community. In these incredibly difficult times that phrase might seem out of place but it’s not, it means even more. If you can’t show up at your office because you are working remotely then find a spot to work and show up for your company there. If your clients need help because they are scared, show up on the phone or in a Zoom meeting. If your family is sad or worried about what’s going on, show up and offer them strength. If your neighbor is elderly and scared to go to the store because of a pandemic, SHOW UP FOR THEM.
We recently entered a bear market and if we use history as a guide it could last awhile. My friend Callie Cox wrote: “Bear markets are a process, the past 11 bears have taken an average of 15 months to find a bottom, and 8 months from the bottom to reach new 52-week highs”. No Bear market since the mid-19th century has dropped 20% and made the round trip in less than 3 months. You know what else? You just lived thru the craziest month in stock market history.
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 horizon not someone else’s. Hyper focus on that, play to your strengths.
One of the great, if not best, things about this nation is that we don’t wait for people to tell us what to do, we do it because it’s right and it needs to happen. In the past when our nation mobilized to defeat an enemy it started at the individual level, then the community level, then the national level. Not the reverse.
Wherever you are, whoever you are, now is the time to heed the words of a great man who is off to a better place: JUST SHOW UP. In ANY WAY you can. For yourself, for your teammates, for your family, for all of humanity.
Thank you for all you did for me Paul and for us at Baird, we’ll never forget you or your words that echo thru eternity.
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.