In today’s Exponential Investor…
- What’s the latest from the Wise Old Owl
- How to relax about selling during a bubble
- Counter cyclicality, ahead of the curve
I read Jeremy Grantham’s latest article over the weekend.
It’s a powerful piece of work.
You can read it here if you haven’t already.
He had a great definition for how to sell, or at least, how to think about selling.
Grantham is an investing legend, and wrote one of the best articles on the subject that I’ve ever read, called “Reinvesting When Terrified”. It was published in March 2009.
Look that one up too. It’s absolutely exemplary counter-cyclical investing, which is the only way to survive and succeed in this industry as long as Grantham has.
Back then, he wrote this:
It was psychologically painful in 1999 to give up making money on the way up and to expose yourself to the career risk that comes with looking like an old fuddy duddy.
Similarly today, it is both painful and career risky to part with your increasingly beloved cash, particularly since cash has been so hard to raise in this market of unprecedented illiquidity.
As this crisis climaxes, formerly reasonable people will start to predict the end of the world, armed with plenty of terrifying and accurate data that will serve to reinforce the wisdom of your caution.
Every decline will enhance the beauty of cash until, as some of us experienced in 1974, ‘terminal paralysis’ sets in. Those who were over invested will be catatonic and just sit and pray.
Those few who look brilliant, oozing cash, will not want to easily give up their brilliance. So almost everyone is watching and waiting with their inertia beginning to set like concrete.
Typically, those with a lot of cash will miss a very large chunk of the market recovery.
It was an article in favour of spreading out a few big injections of capital back into the market, just as everyone was thinking stocks might never go up again.
Things look rather different now. I have pointed an arrow at the publication date of “Reinvesting When Terrified” to highlight just what an incredible call it was. Again, I recommend going back and reading it.
A couple of weeks ago, he published a very different message:
The long, long bull market since 2009 has finally matured into a fully-fledged epic bubble. Featuring extreme overvaluation, explosive price increases, frenzied issuance, and hysterically speculative investor behavior, I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, 1929, and 2000.
These great bubbles are where fortunes are made and lost – and where investors truly prove their mettle. For positioning a portfolio to avoid the worst pain of a major bubble breaking is likely the most difficult part. Every career incentive in the industry and every fault of individual human psychology will work toward sucking investors in.
But this bubble will burst in due time, no matter how hard the Fed tries to support it, with consequent damaging effects on the economy and on portfolios. Make no mistake – for the majority of investors today, this could very well be the most important event of your investing lives. Speaking as an old student and historian of markets, it is intellectually exciting and terrifying at the same time. It is a privilege to ride through a market like this one more time.
But… how to sell? How to think about selling? How to cope with stocks going up after you’ve sold them (seller’s remorse)?
Well, I thought he had a fantastic, simple, and calming approach to that too.
I will also tell you my definition of success for a bear market call.
It is simply that sooner or later there will come a time when an investor is pleased to have been out of the market.
That is to say, they will have saved money by being out, and also have reduced risk or volatility on the round trip.
This definition of success absolutely does not include precise timing.
I like this because it isn’t overly greedy.
If you sell and things go up, don’t worry because you’ve reduced risk, and will still hopefully be right before too long.
I have really come round to the idea that what we are seeing at the moment is a once-in-a-decade opportunity to make money.
It is also a once-in-a-decade opportunity to lose money, but I was already pretty well convinced of that.
So it is perhaps correct to have some investments in risk assets. But it’s also right to take notice of big names like Grantham and Winder saying that this is a time for caution, and profit-taking.
I always go back to my core investing principles.
There are only two risks: losing money and not making it.
This leads to diversification on a single axis: attack, and defence.
So I’m a lot less opposed to being invested in risk assets now than I used to be.
After all, the market can stay irrational longer than some can stay solvent.
And you might make a lot of money in the interim, if you can keep a cool head.
In my mind, rebalancing, trimming positions, and periodically taking profits are all good ways to go at the moment.
The market is taking us on a ride, and we don’t have to sell out completely. But if a position swells too much, or spikes, just take a bit off the table.
Build a cash position, you’ll be grateful when there are bargains on offer.
And being ready to spot trouble early is key.
Perhaps I ought not to say this, but expecting a crash is what allowed me to sell over a third of my investments on 24 February, the first day of the March crash.
Denial of the bear is the last place you want to be.
Because if you’re going to sell, you want it to be sooner rather than later.
I saw a nice analogy this morning, suggesting that the keener bulls in today’s market are like the drunkest people at a concert, still screaming for an encore even though it’s pretty clear the band isn’t coming out again.
I think it might be time for a pint of water, maybe a snack, and a bit of time to sober up.
Have a good one,
Editor, Southbank Investment Research
PS Another date to note, 30 January… 1926. A significant prediction was made. By a clever chap called Nikola Tesla. You probably know him – he was a physicist and engineer, who created a handful of life-changing inventions. Click here to find out what he predicted…