Happy Holidays, dear readers! Believe it or not, the vast majority of the newsletters we write are not, in fact, for our own entertainment. A couple of them definitely are - notably the April Tin Foil Hat series and the October Halloween series - but apart from those semiannual gems, most of the time we are trying to educate, inform, amuse, explain, entertain, and/or deobfuscate.
This one, however, will likely turn out to be none of that. If you’ve been paying attention to those trade confirmations that hit your inbox at the stroke of midnight, you’ll have noticed that we’ve been busy headed into year-end. The following is a glimpse into what we’re thinking, and why. Fair warning, it may feel a bit like climbing up an Escher staircase. But like we said, this one’s for us.
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.
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 Memorial Day!
And welcome to the first official newsletter of ATI Wealth Partners! Don’t worry, it’s the same semi-sensical content you’re used to seeing, just in a different wrapper. Or really, the exact same wrapper, just with a different name. Which, coincidentally enough, is a brilliant segue into this week’s topic: the resurgence of active management.
We’re several months removed from the shock of February now, and it looks like volatility has settled back in for the long haul. Perhaps that has some of you out there wondering if you should have listened to the old investing adage “sell in May and go away”. Several years come to mind in recent memory where that feels like it would have been a sound philosophy; you would have missed the “taper tantrum” of 2015, the debt ceiling debacle of 2011, the other debt ceiling debacle of 2013, and the European debt crises of 2012-.....of pretty much every year.
But the statistics tell a different story.
What a month! And we’re only halfway through it! Well, more than halfway I guess, February being a short month and all...let’s recap what we’ve seen so far:
- The market (Dow Jones Industrial Average) lost 1,033 points last Thursday (2/8). That would have been the largest single-day point total drop in history. Ever. Would have been, except that on Monday (2/5) of last week it dropped 1,175 points.
- Two 4%+ down days in a week led to the fastest correction (defined as a 10% decline from a new high) in 80 years (outside of an outright market crash). It took all of 9 days for the market to drop over 10%. That’s pass out from the g-forces fast.
- And after ending on that note last Friday, this week the market responds by having its best week in nearly a decade.
Everyone has heard of bulls and bears in relation to the stock market we’re sure, but have you heard of the cat? It’s a dead cat, to be precise. And probably the third most-alluded to animal in stock market commentary. If only we had a research assistant who could fact-check these claims…
What makes markets go up and down? Nobody really knows. It’s largely a psychological phenomenon that just happens, but that doesn’t sound particularly convincing if you’re on TV, so they come up with things like “it’s the robo algorithms” or “investors are worried about the increasing costs of doing business” - both of which are literal quotes I heard last month after the market’s worst-ever (at the time of writing) one-day point loss. Both explanations sound decently plausible, except that they’re not.
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.
Happy Solar Eclipse Day!
Fair warning - this note might not find mass appeal, but chances are there’s at least one person reading this that’s as excited as we are about the return of the fantasy football season, and this month’s newsletter is dedicated, dear reader, to you.
Before we begin, however, let us direct you back to our June newsletter, which ended with “buckle your seatbelts”. July was very much a no-seatbelts-needed month. Volatility was nowhere to be seen in the market. The VIX (a measure of volatility, sometimes considered a “fear gauge”), hit an all-time low. All-time, ever, never-before lower. At least 16 of the lowest 25 end-of-day levels on the VIX have happened this year. The market went 15 trading days (3 whole weeks!) without moving more than 0.3% in either direction in any one day. That’s absurd. That hasn’t happened since...ever. That has literally never happened before.
Then, just last week the VIX exploded like a failed North Korea missile launch (...too soon?). It was up 44% in a day (while the market dropped close to 2%). And then this past Monday it dropped 12% as the market rose by 1%, and now today (Thursday) the market is off again so VIX is up 6% as I write this (edit: up 16% at the end of the day). What a week.
Also this month, the final part of our Young Investors series with USA Today was published. You can find it here, on the off chance you don’t start your day with a cover-to-cover reading of the USA Today Money section.
Alright, back-patting over, let’s dive into this fantastical newsletter. Cue generic sports music.
s it just us, or does it seem like the last few years have been essentially government via Executive Order? I mean, sure, Obama had to deal with a completely useless Congress (is that too repetitive?) and Trump is trying to make it look like he’s getting a lot done right off the bat, but still. Do Executive Orders actually do anything? There is absolutely nothing guaranteeing the longevity of an order beyond the term of the administration...In reviewing all the Executive Orders Trump has issued so far, only one of them really directed a change in action. And that one has been halted in the courts. The others have all been basically directives to form committees to either review things or come up with a plan to maybe do things at some nebulous point in the future.
Here’s the problem, as we see it, with Executive Orders. They’re window dressing. It’s the equivalent of one of those wacky waving inflatable arm flailing tube men. Look at that! There must be something over there! What is it? Who knows. What does it do? How does it work? Not a clue.
In the rush to get things done and make a nice headline, all too often we find that the details are poorly thought through, leading to unintended consequences that can even exacerbate the original issue one was trying to address. That is the main problem - unintended consequences. It’s true in government. And it’s true in portfolio management.
About the Blog:
Here lives our collection of newsletters, articles, and some occasional guest posts by outside authors (where indicated) who have quoted us. If you're interested, feel free to browse through the archives here.