"We are more often frightened than hurt; and we suffer more from imagination than from reality." ~ Lucius Annaeus Seneca
For the longest time I’ve wanted to write down everything I learned so far in 2020 so I could refer back to a blog post when the market inevitably goes haywire again. The problem was I didn’t know how to begin, I needed something to jumpstart my thoughts. Luckily my friend Jim O’Shaughnessy tweeted a wonderful quote from Seneca and I finally had what I needed to get going. Thanks Jim, you’re the best.
It has been said to “never let a good crisis go to waste” so I’m half writing this for you and half for me, I want us both to reflect. Now I’m not saying what we are going through is over, this isn’t reminiscing about a bygone era, I just want to write down what I think is important to remember about this tumultuous time while its fresh in my mind.
So without further ado, let’s take a trek through the past 9 months and see what wisdom we can glean.
1) Your equity exposure should be what you can sleep with at night. Don’t forget how you felt in March of 2020 holding stocks. Read that again before you move on. If you couldn’t sleep then you won’t be able to the next time a selloff happens. Find the right allocation for your specific comfort level and then stick with it. Charlie Munger once said: “The first rule of compounding is to never interrupt it unnecessarily”
2) Time horizons drop to zero in a panic. I’m 46, I have a family, I own stocks for the long term to reach my goals. All I could think of earlier this year was selling them because I couldn’t believe what I was seeing. My investing horizon had dropped to the next minute. You have to fight that and if you can’t, get someone to help you like an advisor. The World breaks all the time, don’t let that fact knock you off your plan.
3) The amount of support for markets / the economy is essentially unlimited. As systemic panic accelerated the Fed backstopped whole sections of the market to prevent a financial crisis from unfolding. The US Government passed a multi trillion-dollar stimulus. When things are coming unglued there’s really no limit to what policy makers can do to shore up the system, it just comes down to political will.
4) The stock market is not the economy, but it kinda is. History will likely view the CARES Act as one of the most important pieces of legislation ever passed. The extra UI benefits and stimulus money got us through a very difficult period. The stock market realized how important that was to consumers and that’s one of the reasons it bounced so fast. Just because economic data looks horrendous doesn’t mean the stock market will reflect that, stocks discount the future not the present.
5) Charts can lose their importance at times. Our industry loves a good chart, it’s a staple of interacting with clients. Technical Analysis can be a valuable part of an investing process. That being said, it’s very difficult to stop someone from making a potentially catastrophic decision, in the midst of an overwhelmingly scary situation, with just a chart. Reduce complexity and increase empathy when fear rules the day.
6) Stock Market “Outlooks” are impossible to get right. Strategists often give “market outlooks” to start a year, they are typically snapshots of what has happened and what they expect to unfold over the coming year. If I told you in my 2020 Outlook that we’d see a Global Pandemic, social unrest, and a stock market crash you’d probably want to spend the whole year in cash. As I write this the S&P500 is up 5% YTD. Even if you had every single piece of information on January 1st about what would unfold you’d still have trouble making money off it. This is one of the reasons I dedicated my professional life to the study of Behavioral Finance. Your behavior in a panic is PARAMOUNT to your success.
7) We should study history but realize that it’s not a guide to the Future. In the GFC stocks fell 55% from their highs. I remember telling someone “it fell 50% back in 2007, why wouldn’t it this time, this seems worse”. Stocks bottomed down 33% this year. Look to the past for context but realize what you’re going through is always unique.
8) Market Structure matters…a lot. The top 5 stocks in the S&P500 are AAPL, AMZN, FB, GOOG, and MSFT. They represent 21% of the weight of the entire index and they are arguably amongst the most successful companies in history. Whatever you’re expecting the overall market to do, you need to consider how those 5 will act.
9) Companies (and by proxy their stock price) can adapt to difficult situations RAPIDLY. Baird basically pivoted a multibillion-dollar financial services firm to all remote work in less than a month with little to no impact on our customers. There are numerous companies who actually grew and took share through the worst of the Pandemic. Good leaders know how to adapt their businesses quickly to changing conditions and the stock market rewards that. This was not the case for every company but it was for some, next time look for them.
10) Find someone to talk to when things go haywire. I had lived and worked through the GFC but I didn’t know how to process a Global Pandemic. I found a few new friends on Twitter, Doug Boneparth and Conor Sen, and talked to them when things were really hectic. They were in different parts of the country and had different viewpoints and our interactions kept me going. Don’t go at it alone. Lean on your friends, family, advisor, colleagues when you need it the most because they will help get you though.
I’ve never seen a year that argued more for “sticking to your plan” than 2020. If you fell asleep, or forgot you owned stocks, from March to August you would’ve shrugged your shoulders and said “what was the fuss about?”
Dwell on the quote I used to start this blog because the wisdom it conveys about our experiences as investors lives through the ages."We are more often frightened than hurt; and we suffer more from imagination than from reality."
There are lessons we learned from the market during this crisis but they pale in comparison to lessons we learned about ourselves.