DO THE OPPOSITE OF WHAT FEELS GOOD (THIS IS NOT THE 60'S!)
With the turmoil in the stock market this week, I want to pass along some sage advice I received decades ago at The Bistro from the enigmatic Bob Vukovich. One evening while the boisterous crowd complained of the latest setback in stock prices, Bob looked at me over the rim of his icy martini and asserted, "Always do opposite of what feels good, and always do opposite of what all of your friends are doing at the time." He held my eyes with one of his steely glares which told me he was conveying one of his financial pearls.
Years later, through numerous setbacks, crashes, and missed opportunities, I have held this advice as the most important investing axiom, with almost everything else counted as "in the noise." For two decades I spoke at conferences, seminars, and country club dinners about basically one central theme: We as humans are genetically-designed to make the exact wrong investment decisions at the worst possible times. It's not our fault! It must be the chemicals or the DNA helix, but rest assured that every, and I mean every, human has this affliction.
I have always shown our audiences Morningstar's mutual funds study which detailed how over a 10-year period the average mutual fund had produced a +10% annual return, but the average investor, in those same exact funds, actually lost 2% per year! People yell out reasons - "Fees!" "Taxes!" - but the unfortunate, sad answer is actually "buying high and selling low." We all do it! The market is hot, that sector is hot, and everyone at the cocktail party is making money, except us! So, we buy. The next day it starts to fall, slowly, painfully. We are furious, but we hold on, death by a thousand cuts. Finally after 14 months of pain, we lose all patience and hope, and we sell. What happens the next day? Of course, it starts to go back up! The great majority of us real people never accumulate long-term wealth, even when truly trying to do the right thing. It's not our fault!
Here's a few tips and insights to help us at least make less mistakes than our neighbors:
1. If everyone at the cocktail party is buying "Uber stock," pass on what has already become the flavor of the month.
2. When all of your friends, the dumb money (sorry, obnoxious industry term), are making tons of money in the market, take that opportunity to take a few chips off the table, or at least rebalance.
3. When all of your friends are taking a blood bath and becoming suicidal, have a couple Glenlivets and add to your positions even though CNN says the world is coming to an end. For this, you must keep some powder dry for Black Swans.
4. You, and every computer on Earth, will never pick market tops or bottoms, so hit singles and doubles which compound into an incredible long-term career.
5. Balance, and rebalance, your investing so that your up and down swings are muted and do not cross your emotional thresholds. We always ensure our clients carry at least 13 different "slices of the pie."
6. Realize that all of your friends at the cocktail party lie, especially the men. They tell you about the one stock that tripled, but not the nine losers. Stay the course.
7. Understand sunk cost, the phenomenon which controls human investing psychology. The price you paid for a stock or a house or a company has nothing to do with today's analysis of whether you should sell, or buy more.
8. The stock market went down today because "there were more sellers than buyers." That is all. The explanations from 1,000 pundits mean nothing, and are most certainly wrong.
9. If you can find someone who can truly help you, which is rare, pay them 1% a year to stop you from costing yourself 5-10% less return a year (see Morningstar). You don't need them when times are easy, only when rough, so make sure they are strong enough to stand up to you and to not let you hurt yourself.
10. If you must fiddle with your retirement account, sell the "good ones" and buy more of the "bad ones." You will outperform the entire office if you have the fortitude to do what feels "bad." Better yet, don't fiddle.
This week Benjamin Graham, the father of value investing (buying undervalued "boring" stocks and holding on) would have been 125 years old, so let's look at this simple growth versus value dilemma for real people. Over the last 5 years, the S&P 500 Growth Index (Amazon, Alphabet, "sexy") has averaged a 14.2% return annually. The S&P500 Value Index (JPMorgan, AT&T, "boring") has only gained 8.7% annually. All of your co-workers are right now following the guy in the office kitchen whose telling them to sell their value funds and add to their growth funds in the 401k plan. But, back in 2000-2002, growth stocks and funds were crushed, so investors over the next 10 years sold these funds (after crushed), pulling out $273 billion and then loading up on the value funds, which of course then have now underperformed (see Morningstar). See how it works? Get off that rollercoaster.
Fund fees of 1% or .5% or 0% have almost no bearing on the eventual real life return of real people. This is the industry making you believe this should be your focus. John Bogle and Vanguard have both been brilliant, but that is a totally separate subject, with separate impacts. All of that noise doesn't matter when you factor in real life emotions and needs of families, retirements, college, medical issues, egos, fear, greed, you name it. Do you get it?
The noise is deafening out there, and you are constantly bombarded with misinformation. Just this week I read about Uber's, Lyft's, and WeWork's "new accounting." I remember that phrase worked in 1999 until it didn't. Losses don't matter, until they do. Well, I know it's a confusing world out there, but I wanted to hopefully help simplify the big picture just a little for you, as successful long-term investing periodically demands courage to not follow the crowd, and to stick to your discipline. This week do the opposite of what feels good!
"Investing is so much simpler than people make it to be, yet so much harder to actually do." - Bob Vukovich, "Just One More"
** Thank you very much to the WSJ, Forbes, Fortune and Jason Zweig's Intelligent Investor column for the above quotations and statistics.
** For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.
** To access JAM Views directly please visit jeffreyamartinovich.blogspot.com
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