Who’s Driving this Crazy Thing?

by | May 29, 2020 | Investment Discipline

We all view the world and our money from a unique and personal vantage point. I’ve had several calls over the past few weeks with an understandable wide range of emotions over the state of the economy and the direction of markets.

The economy and the market are related, but surely not twins.

COVID has shut down large parts of the economy, while the market gets better as the economic data gets worse. Aided by massive government help, the market is looking past the ugly reality. Markets don’t always makes sense in the short-term as the collective wisdom (or lunacy) of investors tries to figure out the future and price it today. Right now, it’s telling us we’ll get back to 90-95% of normal soon.

I just attended John Mauldin’s SIC 2020, with leading investment professionals and economists from across the globe. The range of predictions was for 40% declines to V-Shaped Glory and everything in between. Predictions are folly that have no value.

I have no idea on short-term horizons. Neither does your neighbor’s adviser, CNBC, or Warren Buffet (who would be the first to tell you he can’t predict the future).

For the short-term: Forget about logic. Forget about timing markets.
For the long-term: Focus on your goals, your time horizon, and the right asset mix.

These time-tested principles better protect you against loss without sacrificing your goals. You can stop here and take my word for it, or read these three tales below and see which makes most sense to you.

A Tale of Three Philosophies

1) Early in my career I worked for a sophisticated and savvy technical trader and portfolio manager. Highly educated and credentialed. His process began every day by listening to the market and stock calls of every brokerage on Wall Street. Over the course of the dot.com run up and meltdown, he employed various option, shorting, and market timing techniques. His tactical prowess drained his personal net worth from $100 million in 1999, to less than $10 million by 2003. Client portfolios lagged benchmarks every year by a wide margin. His standard line to clients: “we continue to see incredible opportunities. Unbelievable opportunities.” Indeed.
It was a great learning environment in what not to do: excessive trading and market timing is a good way to lose money. Even if you get the direction right, tax inefficiency eats up much of your profits.

2) Another portfolio manager I studied focused on fundamentals. He won Morningstar’s “manager of the year” three times. An astute, true student of investment history. His economic and valuation prognoses were 100% correct. His timing was not. He lagged the market prior to 1998-2000 dot.com meltdown because he was heavy in cash. He outperformed when the market tanked, and then lagged again when the market recuperated. He repeated the feat before and after the 2007-2009 decline. His stated goal was capital preservation. The net result: he lagged his benchmark through the cycles by almost 1% per year (18% lower than his benchmark – before taxes I might add).
Fundamental insights need to get the direction right, require good timing, and be tax efficient: at best, the loss-win ratio is a coin toss (the data shows the loss ratio is much higher than 50-50).

3) Asset allocation avoids trying to time or outwit the market, pick the next Amazon, or find the next Warren Buffet. The goal: find the right asset mix that balances your need for return with your need for capital preservation and peace of mind. The discipline reduces risk by combining assets that don’t always move in the same direction. Periodic re-balancing keeps your mix consistent, and allows you to buy-low and sell-high without emotion. Timing the markets is a losing game; time in the market determines your success.
A well-designed asset allocation maintains more value in the investment process because it accounts for your time horizon, is consistent, and reduces risk.

The human emotion of fear crosses all wealth classes

I’ve watched markets gyrate over the past 25 years, and worked with billionaires, millionaires, executives, the middle-class, and paycheck-to-pay-checkers. The human emotion of fear crosses all wealth classes. Noble prize winner Daniel Kahneman demonstrated that fear of loss distorts our thinking and is a much stronger emotion than the joy of winning.

Getting the mix right helps to minimize emotions, and keeping to a discipline offers the best success rate for your planning horizon.


Jerry Matecun – Founder, President
Expert guidance to plan your future, preserve your lifestyle, and retire with confidence. For a confidential consult, contact me at jerry@compoundvalue.com or 949-273-4200.


PLEASE NOTE: Nothing herein constitutes investment, legal, or tax advice. For details please see Disclosure.

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