A Long Nap – I’m Woke

By David B. Armstrong, CFA | Feb 08, 2019 | Weekly Market Commentary

It’s really important that investors understand what has happened over the past two months. Ask yourself, do you even remember what caused the Christmas Eve sell off? If you do, do you still possess fear over that issue?

Furthermore, what were your emotional reactions? I suspect there was a lot of fear and anxiety – and that’s understandable. No one likes to see account levels decrease even when you fully understand that markets do not go up in value in a neat, straight, 45-degree line on a graph over time.

Here’s another question: what is your emotional state now? I suspect a lot less anxious and maybe even indifferent.

That’s because losses hurt twice as much as gains. The market falls 10% and everyone, especially the media who gets paid fat cash to draw in viewers, freaks out. The market gains 10% and it’s, “Ehhh, that’s cool…did you see that YouTube video called “The Can Opener Bridge”?

Just so you know, here’s how things look year-to-date (as of 2-8-19).

In a blog post titled “Trump and the Tariff Man” published back in December 2018, I wrote that the best research and thinking is found on Twitter and in blogs rather than through “one way content” such as research reports from big Wall Street firms or media broadcast across the Twitter universe.

Idiots and charlatans on Twitter don’t get respect and don’t get followed. In fact, they get called out…sometimes viciously. Conversely, CNBC and other traditional media sources rely on capturing eyeballs to drive advertising rates through sensationalism, hype and drama, and there is no immediate way to call them out on the spot.

That means I read and digest thoughtful content from folks who are technically competitors…well, on paper anyway. In reality, we are all pros and generally outspoken critics of a broken financial services industry serving their master – sales. So rather than view each other through the close-in camera lens of competition, we choose the wide-angle lens viewing each other as colleagues acting in concert as fiduciaries on behalf of investors’ best interests.

On that note, a great piece just came out from Michael Batnick, CFA over at Ritholtz Wealth Management. It’s titled, “Miss the Worst Days, Miss the Best Days.” He has a larger lesson that I’m going to gloss over and instead cherry pick a smaller point he makes about not being in the market when it is experiencing advances:

If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five-year treasury notes. This remarkable data point is almost always followed by “time in the market beats timing the market.” I’m generally on board with this line of thinking, however, I don’t necessarily agree that this chart is the best way to prove this point.

He then goes on to say:

The chart below shows what happens if you were able to successfully avoid the 25 best and 25 worst days. This would have put you well ahead of the index. Of course, this assumes perfect end of day execution, no transaction costs, and most importantly, no taxes.

Here’s the chart.

He concludes with:

I haven’t yet mentioned the most important assumption, which is that you could stick with this for twenty years…would you have been able to stick with it when it is dramatically underperforming the index?

He’s got a point. You should go read his blog; He’s smart and I hope over time we stack the house at Monument with people of his caliber…but I have a different point.

What if the “All Days” line was good enough to get your wealth to a level necessary to fund all your goals and objectives? What if you didn’t waste your time trying to perfectly time the market and account for taxes and costs but rather just had a long-term strategy to make sure you were not out of the market on the 25 best days?

It’s easy. Frequent readers are already anticipating my drum beat of the real silver bullet: patience and discipline.

I personally know people who completely abandoned a reasonable, well thought out investment strategy last quarter simply because they were not making money over a short snapshot in time. I’ll bet that their knee jerk reaction was to sell and go to cash because “they just had to stop the bleeding” or some other common response to losing patience and discipline.

In other words, they were riding the red line above.

It’s easy to be the “All Days” line and not the “Missing 25 Best Days” line. It’s called having a plan that projects out any need for cash over the next 18 or so months and leaving your investments alone.

With a plan like that in place, you have no need to sell on Christmas Eve and you are happy that you’ve seen a lot of that sell-off rebound back.

In other words, you are “All Days.”

Keep looking forward.

Dave

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