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Travel is back! We were in the Dominican Republic last week, our first international trip since COVID. It was...refreshing, in a lot of ways. The flight out of Logan crack-of-dawn early, so we stayed in an airport hotel the night before. There was a line at check-in, and the parking lot was completely full. Also full - the 4:30am shuttle bus to the airport in the morning. Literally every seat. Not "every available socially-distanced seat", every single seat in the thing. And the airport was the busiest we've seen since the Sunday after Christmas. The line for Cinnabon in BWI was a solid 30 people deep. Also, Terminal A in BWI is now open again, which it wasn't in June, November, December, or January.
Perhaps the most striking thing about the fellow passengers? It wasn't Spring Break week, the airport wasn't packed with families and little kids. It was mostly older folks. A lot of white hair, and way more Columbia, sneakers, and backpacks than Hugo Boss, oxfords, and briefcases. Have vaccine, will travel. (As an aside, to get back into the States from overseas requires either a negative COVID test within 3 days or documentation of a positive test and recovery within the previous 90 days. Even if you've had COVID and recovered, we'd highly recommend going the negative test route. Watching the airline check-in employee try to make sense of a random lab printout and equally non-uniform clearance from a random state health department leaves a lot of room for translational errors. Just go with the standard lab report from their own country's labs that they're used to seeing.) Relatedly, have you noticed how almost every restaurant or retail shop has a 'Now Hiring' sign posted in the window? At least they do up here. It makes us optimistic for what could be a rather booming economic recovery this summer, especially if vaccinations continue apace. Which brings us back to the disconnect between financial markets and the underlying economic reality. The stock market bottomed on March 24th last year and was up around 40% through May while in real life, lockdowns were becoming more draconian and more and more businesses were getting shuttered. We wonder if there will be any symmetry to this coming out the other side - businesses are hiring, travel is coming back, countries are reopening borders, economic activity is picking up...but this has already been effectively "priced in" by the markets. Is there much upside to be captured in stocks from economic growth when that growth merely confirms the underlying assumptions justifying such market levels in the first place? We shall see.
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What a week! Down with the shorts! David vs Goliath! Occupy Wall Street! Stonks!
The current tagline of r/wallstreetbets is "Like 4Chan found a bloomberg terminal", though for most of Thursday and Friday it actually read "Like 4Chan found a bloomberg terminal illness". Which is both clever and the most accurate description possible. We imagine a lot of people were exposed for the first time last week to some fairly nuanced and advanced financial concepts that got completely mangled in the media because who has time for nuance these days, right? Well, we do! So let's unpack what's going on a bit. "Capitalism is the worst economic system ever invented...except for all the other ones."
- Winston Churchill (paraphrased) et al. One of the main effects of this virus - and our response to it - has been to shine a light directly on all the broken parts of our societal system. A really harsh, fluorescent light. In some cases even a seizure-inducing strobe light. Whether your particular flavor of failure du jour is institutional, political, economic, macro, or micro, there is something there for everyone. Remember all the outrage over "faithless electors" a few years ago? That was people waking up to the fact that their vote doesn't matter. In point of fact, you don't actually vote for President at all. You are really voting for which party you want to appoint a donor fundraiser elector to vote for you. This is like that, but with everything. In the interest of page limits, we'll stick to our broken economic system for now: Covid killed capitalism. Well. We knew we didn't have any kind of monopoly on rogue waves, but this one...wow. Iceberg ahead, captain.
In early March, when stocks were down 15%, we wrote that if you were asking yourself "should I be selling stocks", our answer was "yes". Apparently, nobody listened. Shelter-in-place orders turned people to day trading in a big way. E*Trade, TD Ameritrade, and Charles Schwab all saw record new accounts in the first quarter of the year, with Schwab alone reporting 300,000 just in March. All 22 trading days in March were among Schwab's 30 most active days ever. For the new hundreds of thousands of you that will soon be asking "should I sell my stocks", we will reiterate: yes. Part 2. There is so much to unpack economically here, it might take us the rest of the year. So we’ll just start for the time being with a real-time post-mortem of the stock market and economy. A peri-mortem, perhaps. Things in the land of fiat money and made up valuations are...bad. Like, Stewie destroying Mr. Rogers’s Land of Make Believe bad.  The S&P 500 had a closing high on February 19 of 3,386. As we write this on March 19, exactly one short month later, the S&P 500 is sitting at 2,323 about 15 minutes into the trading day. That is a loss of 31% in a month, which is the fastest drop into a bear market from an all-time high on record (the red line).   We had originally intended to keep unpacking December’s This One’s For Us newsletter and get into the superstitions and black magic of technical analysis...but things have taken a rather interesting turn in the last week, so let’s address the elephant - er, the bioengineered microscopic pathogen - that’s (probably) in the room. It’s not yet April, so we’ll try really hard to stick to facts...or at least what has been publicly admitted to.
Here’s what a pandemic looks like: To pick up where we left off last month: Diversification, huh, what is it good for? Well, most people would say a lot, that diversification is the foundational bedrock of an investment portfolio. But also - and this next point might be somewhat controversial - nothing.
If you want to make money in the stock market - like, turn $1,000 into $100,000 money - you won’t do that with diversification. Well, you will, but it’ll take 50 years. The quickest way to make money is by making a very small number of very large, concentrated bets...and then hopefully the bets pay off. Think of any famous investor you’ve heard of, and they’ve probably made their money that way. The problem is, it’s a huge gamble. For every one investor you just named, there are hundreds that nobody has ever heard of, because they lost. And then there’s the ones that made it to the big leagues and subsequently crashed into bankruptcy: Long-Term Capital Management, Amaranth Advisors, Marin Capital, Tiger Management, MF Global...the list goes on. So sure, you can do all kinds of research/activism/questionably-legal market manipulating activities to try and make the gamble less of a gamble (*cough*hedge funds*cough*), but any investment with that kind of payoff comes with all sorts of risk. That risk is exactly why the SEC, in their paternalistic omniscience, have limited most of the best investment opportunities out there to “accredited investors”. For the vast majority of “non-accredited investors”, that level of risk is unacceptable. If your investments are in the form of a 401(k), or maybe you have a brokerage account but know you will be needing to use those funds in retirement, the possibility of losing all your money should never be on the table to begin with. Yes, turning $1,000 into $100,000 a couple times over would be nice, but we’ll choose instead to take the worst possible outcomes off the table and make money the old-fashioned way: savings and time. And so we turn to diversification. Diversifying will not make you money, but it will certainly mitigate potential losses. This summer, like every summer for the last 600 years, saw the annual Running of the Bulls festival in Pamplona, Spain. This summer, like every other summer for the last 10 years, saw the continuation of this current bull market for stocks (“current” assuming no unmitigated disaster between writing and press time). In point of fact, August marked the longest ever bull market in the US - our very own running of the bulls.
¡Olé!
The annual Running of the Bulls was held in Pamplona last month, in a tradition that dates back to at least 300 years before the signing of the Buttonwood Agreement (the precursor to the New York Stock Exchange). Not to be outdone, Wednesday of last week saw a celebration of sorts for our own “running of the bulls” - the longest bull market in history for stocks, at 3,453 days and counting. Bull markets are, somewhat ironically, defined more by what they aren’t than what they are. As long as stocks don’t drop more than 20% from a peak, the bull market keeps running. If they drop more than 20%, the bull market gets posthumously dated to the last peak and all of a sudden you’re in the middle of a bear market. Or they don’t get backdated and you have to wrap your head around having lived through a Schrodinger’s cat-esque market that was technically both bull and bear since the last market peak. Not to worry though! As of this writing the S&P 500 has surpassed the January 26th levels to reach a brand new all-time high, so this bull market still has legs. Probably. Happy 2018!! (Blows noisemaker.). POP! What’s that? The sound of the market bubble popping? The crypto bubble popping? (Confetti rains down). Ahh. Just the confetti popper thing. (Sigh of relief).
The first newsletter of this new year is brought to you by the letter “A”. As in “Active Management”, inspired by a real-life conversation with a JP Morgan salesperson last month. Risk is one of those words that means something different to everyone...and therefore has people coming up with various vague yet philosophically profound-sounding definitions like “the possibility of more things happening than will happen”, “the unknown”, or “am I the eponymous character in a live-action Schrodinger’s cat experiment?” (okay, we made that last one up).
For financial planners like us, risk is paradoxically both the antithesis of our business but also the main reason we’re needed in the first place. Heath Ledger’s Joker had a nice little quote about this very thing: Batman: “Then why do you want to kill me?” Joker: “I don’t...I don’t want to kill you...what would I do without you? No, no, no!...you….complete me.” Technically, I think in that example risk is actually Batman to the financial planner’s Joker...but we’ll go with it anyway. So where does risk come into play in financial planning? Well, everywhere. But we’ll just look at two examples today: insurance and portfolio management. |
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