Yesterday a couple of comments came in that were a little surprising given the context of the blog posts over the last couple of weeks. One reader asked what I do on days like today (meaning yesterday) when things like emerging markets, commodities and foreign in general go down more than the market. He wanted to know if I reexamine assumptions, make any tactical moves because of such a day or watch it like water torture.
Another reader late in the day posted a comment asking what was wrong with Statoil (STO) which is a client holding. At the time this comment came in STO was down something like 3.60% and client holding WisdomTree International Energy ETF (DKA) was down about 3.20%. What's wrong?
Dudes!
I gave brief responses to each comment but thought it would be worthwhile to expand in a full post. For anyone who considers themselves an investor (versus a trader) it is very very unlikely that any thesis you believe in can be invalidated (or validated for that matter) based on the action of one trading day.
Yesterday I was down a few more basis points than the S&P 500 and this was not the first time in my career this has happened. Far from water torture I had a great day. Got my morning reading done, did some trading (implementation of a couple of new clients), shoveled snow for a couple of hours (this is fantastic exercise), took Roscoe for a walk down to get our mail (our box is about a mile away) and then did more reading later in the day capped off with some sports watching. Letting the market or my performance versus the market dictate whether or not I enjoy the day seems crazy to me and no way to live.
A big focus here, with a nod to John Hussman, is to focus on having enough money when it is needed. One way to go about doing this is to think about performance over the course of the entire stock market cycle. A couple of weeks ago I posted a made up example where an active (as opposed to passive) market participant lagged the market every year from 2003-2007, was lucky enough to get defensive on January 2, 2008 and so was 30% ahead of the market for the cycle. I asked rhetorically whether or not this person beat the market.
Themes or assumptions or whatever you want to call them need a long time to be proven right or wrong. Let's say you believe in coal as an investment and you buy your favorite coal stock and it goes up 30% in a couple of months you have made a good trade you have not had the theme validated. The other day day I mentioned that I was considering swapping out of a stock and into a similar ETF. I executed the swap earlier this week selling Monsanto (MON) and buying Market Vectors Agribusiness (MOO). I bought Monsanto on the way up at about $88 and before the trade settled (this is an exaggeration) I was able to sell some at $120. As time went on the stock went down a lot when the market did but lagged its group badly on the way back up. Lately there was some news out that could weigh on the stock a little longer so I made the swap. If I am wrong about MON continuing to lag then its weight in MOO would benefit the fund.
The point with Monsanto is that for me it started out as a good trade but proved out, for now, to not be a great way to access the space. Please note this unfolded over a couple of years not after a bad day.
I've owned Statoil since late 2004. As it was then, it is a proxy for Norway. I bought in around $14, sold some in May 2006 at $41, sold some more in May 2008 at $42 and then bought some back in October 2008 at $16. The prices here belie a certain amount of volatility inherent in the name. That on a given day it went down more than some proxy means nothing. It may not be the best way to own Norway (I think it is you can decide for yourself) but it is a proxy for the country. That did not change yesterday.
It has had a couple of big drops since I first bought it but in that time, even with the volatility it is up about 70% versus flat for the S&P 500. I have no idea if that will repeat over the next five years or not but I believe Norway to be a more attractive investment destination for that time and so will hopefully keep the name for the next five years (assuming they do not do the equivalent of BAC buying Merrill Lynch). This is a multi year theme that has added a lot of value thus far despite the occasional bad day, month or quarter.
I'm not sure what it takes to get investors (not traders) to truly take a long term focus. Hopefully the example above where the guy lagged every year of the bull market but by getting defensive came out way ahead resonates with some people. Between having an objective trigger point for defensive action and being able to see one or two very large macro themes you can add a lot of value to your result over the entire stock market cycle. I would add that adding value does not have to mean outperformance it can also mean value on a risk adjusted basis too.
For some this falls deaf and that is ok. All I can tell you is I do not want any day in the market to be torture of any sort nor have it trigger any sort of negative energy.
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9 comments:
Amen!
lol, thanks RW
Zenmaster Roger--I didn't ask either question yesterday, but I have some sympathy for those who did.
A case in point--I have a healthcare stock that was absolutely obliterated yesterday for no apparent reason. Today, Barron's opines that it may be time to sell healthcare stocks. It's hard for me to sit here and think about an entire stock market cycle, when everybody and their cousin is implying that I'm making a mistake.
Your post is wise and you're right, of course. I'm just sayin' it's hard, that's all.
Hi Roger: I am the water torture guy, so I greatly appreciate the comment. I have been at this for quite awhile, but truth be told I have never really quite gotten over the shock that was 2008. My guess is I am not alone in this. Thus while I want to think big picture/long term, when I read all of this bearish commentary that permeates the net (one need go no further than the self described whilte knuckled John Hussman, but he is by no means the only one, as we all know), I find it very, very difficult to be "zen-like" when many of my holdings are going down in unison. While I appreciate having an objective parameter like the 200 day to use as a "stop", on the other hand when my portfolio loses more than the S&P (like it did yesterday),I find myself wondering if this is the beginning of another 2008, re-visited. Anyway thanks for the blog, perhaps you might consider a side job as a therapist for investors, I am sure phone consulting would work and might be a nice way to supplement your income.
BEst, L.D.
your rationale comments and approach is frequently needed for many of us fools.
I'm no zenmaster. If you think you've ever seen something close to insightful on the website it probably came from someone else.
I simply do not believe there is any reason to live through your portfolio. Occasionally we all due something that turns out to be unlucky like buying a stock a day or two before it drops a lot on mews that could not reasonably be foreseen.
That merits a "damn it" but it happens and once it does there is not changing it. Getting more upset cannot change the bad trade we just did. Apply this to whatever.
L.D., you're not alone and your comments capture the uneasiness that I share with you. I guess that's why behavioral finance is such an interesting field. Other than diversifying (which didn't help a bit in 2008,) I think the best thing for me to do is turn off the computer and play more golf.
If the daily ups and downs of the stock market are so bothersome and, let's face it, hard to figure out, maybe it's worth spending some time evaluating your investment strategy? Would ETFs or mutual funds get you similar results with less froth and therefore less need for Tums?
The issue raised here is core to the reason I'm an index investor. I could never explain why stocks did what they did on a year to year basis.
@Roger,
Would you be able to e-mail me at MDCigan@gmail.com. I've got some RIA business type questions I'm hoping you might be able to answer for me. Thanks in advance for your time!!!
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