The title of this post is a sentence Corey Hoffstein said in a recent podcast episode with Meb Faber.
Jeeez how much I miss Pirates of Finance.
It is a very simple sentence that highlights how, in many cases, finance adages are not that “simple” to adopt.
Corey concluded that usually that blood is your blood and he’s right. If you are supposed to be invested all the time (time in the market beats timing the market, to pick one), where does the cash you are supposed to put to work once fear devastated other investors’ souls come from?
In a post from the past (cannot recall which one, so sorry no link) I described how the strategy of keeping cash on the sideline to be deployed during market corrections is a loser strategy. In short, it loses for the same reason a lump-sum investment beats dollar cost averaging: if you invest in an asset that goes up in price, the longer you hold it the better (time in the market, innit?).
Yet it is a strategy employed by many investors, in many cases convinced that it will yield not only lower volatility (yes, duh) but also higher returns. One of the investor’s justification is that “they need to store cash for emergencies anyway”…while (conveniently?) forgetting, for example, the correlation between stock market downturns and them losing their job.
In my opinion, a better strategy to deal with the need for an emergency fund is to open a margin account to borrow against our portfolio if and when needed (only if the emergency target amount is <<< portfolio!). Sure, you are going to pay interest on the borrowed sum but that cost should have been already “repaid” by the fact that you stayed fully invested in the past. This strategy clashes with many infamous lines, like this one from Warren Buffett: “If you don’t have leverage, you don’t get in trouble. That’s the only way a smart person can go broke, basically. And I’ve always said, ‘If you’re smart, you don’t need it; and if you’re dumb, you shouldn’t be using it.'”
The reality is that financial quotes might act as comfy blankets investors can wrap around when in doubt, but they will not prevent them from questioning their choices 100% of the time.
Ben Carlson just created this meme:
See? Same matter. You do not want to be a momentum/trend-following investor because you would buy at high valuations. But you do not want to be a value investor either because you want to avoid trash.
(curiously, you might be fine being this guy though, eheheheh).
Whatever your quote, and your related investment strategy, it cannot work EVERY TIME, ALL THE TIME otherwise…you are dealing with a Ponzi scheme (or a version of Taleb’s turkey). The pain is necessary to have a gain at the end of the road, there are returns because there are risks (which does not mean that whenever there are risks, there will eventually be returns).
“It is supposed to be hard“, said Popovich to Kerr and Kerr to Curry.
Corey’s sentence made me think about those guys who are claiming “At 5%, I am buying all the Bills/Treasuries I can”. Sure but, out of what? If you are already 100% invested, you have to sell something in order to buy Bills. By the time Bills yield 5%, stocks are also down 20%, meaning if you liked stocks’ potential returns up there, you have to like those more down here. There is a trade-off.
A 5% certain return is better than an uncertain 8%?
For some people, yes. But this is definitely different than saying “If 30-year TIPS yield 4% real, I’ll sell everything to buy them”. If you get a guaranteed 4% withdrawal rate for a very long horizon, then sure, I am in too (provided there is a universe where I would like to retire in the US or a country pegged to the USD). In that scenario, I understand no one would care at what price you sell stocks (let’s forget the endowment effect) since they reached the goal (if that was the goal).
But a 5% that can turn into a 4% or 3% tomorrow (in the Bills case)? If that happens, what do you do, jump back into stocks…which have already shot 30% up? [look, I understand there is a scenario where rates go to 2% and stocks are down 50% but if that’s the case, I’ll bet 5 fingers you won’t be the guy buying stocks]
Let’s be honest, most of the people claiming their hungriness for 5% yields are ALREADY wealthy (according to themselves, which is the most relevant opinion) but still in the accumulation phase. They are allocating “new” cash to bonds, not really selling stocks.
Their reasoning is not that different from the JEPI/covered call stans. “Well, if the market makes 20% and I do 10%, I am good”. Usually, in their mind they compare that 10% with stocks historical average of 10% and think that the lost opportunity is pretty small. Unfortunately, they do not understand that being exposed to markets that do +20% is what is necessary to arrive at that 10% long-term return. If you cut the upside, you are ALSO cutting the long-term return.
The difference is that the 5% stans can really do well with their wealth growing 5%.
The covered call stans, and I would put dividend investors as well here, instead think they are somehow smarter because they choose this high yield – less volatile strategy. Like no one else had access to YouTube and those cringy thumbnails, Sherlock.
Any systematic strategy to lower volatility, to lower the pain, can only lead to even lower returns. What do you think, that you are the only one who enjoys collecting dividends from the beach?
Wait…this is a blog that affirms every 3 posts that gold and/or trend following and/or leverage can lead to systematic higher risk-adjusted returns. This is (was?!?) possible because few believe it is possible. Holding gold is not painless…unless you are only surrounded by gold bugs, and in that case other relevant aspects of your life would be highly miserable.
“It is supposed to be hard”
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