This Is Not a Market to Fear. It’s Winning Time!

Dana and I just finished a great series on HBO called “Winning Time.” It tells the story of the 1980 Los Angeles Lakers basketball team, and its eccentric owner, Dr. Jerry Buss. It is also the story of Magic Johnson’s first year in the NBA. That my wife enjoyed a TV series that in part was about sports is enough to conclude that anyone can enjoy it. Especially those of us who lived through it. In the investment markets, it’s also “winning time.” I say that despite the S&P 500 having posted a 16% year-todate decline, while the Nasdaq 100 has lost a whopping 25%. Bonds, the usual alter-ego to stocks, have been anything but that, with Barclays Aggregate Index off 10% and Corporate bond index down a frightening 16%. Any type of traditional asset allocation is in double-digit negative territory. Where’s the winning in that?!

Modern Portfolio Theory: if the name doesn’t fit…

That’s exactly my point. There is no winning in traditional asset allocation. Not anymore. “Modern Portfolio Theory” was created around the time that the “Winning Time” series took place. If you saw the mustaches, clothing and other details reflected in that “period piece,” you know it is anything but “modern” today. Yet MPT as they call it is still the thing that many professional financial advisors cling to, even in the face of its obvious demise. Why is that? The answer may concern you.

It is this simple: many professional financial advisors and big Wall Street firms are simply “talking their book.” That is, they need to be permanently bullish about the prospects for the stock and bond markets. That’s how they get paid! The industry is primarily compensated based on assets under management. That means that when the value of traditional portfolios is falling, firms’ revenue is falling with it, unless they can both keep existing customer and attract others.

Why many firms are selling advisors and their clients to suit their own agenda

The latter course is not as easy when everyone is a bit freaked out about the markets. So, in a desperate attempt to “stay positive,” pundits wax poetic about how the Fed will get it right, fundamentals are still solid, inflation will peak and not be a problem, etc. etc. blah blah. There’s only one problem with that: the market doesn’t care. Investors sell when they want to sell, and after a giant post-Covid breakout gain, investors are giving it back in rapid fashion. It’s always this way, eventually. I’ve written about it pretty much every week since we started this newsletter in November, and for a few years prior to that. The great unwind of unsustainable easy money and easy investment returns is upon us.

What should you do, especially if you are in retirement, nearing retirement, or advise those in retirement? Answer: ANYTHING BUT WHAT MOST IN THE INDUSTRY ARE DOING RIGHT NOW.

  • Most investors and financial advisors seem to have never heard of hedging and have no idea how to play defense. We do so in more ways than we can count. Because successful investing is not about how well you do when everyone’s making money. It’s about how you do when everyone around you is losing money.
  • The “buy the dips” mantra is still not snuffed out. As an active manager who learned how to play defense a long time ago, it’s amazing to me that every selloff seems to be followed by an almost obligatory bounce of 2-3% in a single day. As we have said all year, that’s as good a sign of a bear market as any.
  • The key to navigating this market is no different than what we’ve preached here for months: expand your universe of investments to include those that can profit when stocks or bonds fall, be ready/willing/able to speed up your transaction pace and shorten your investment horizon to a “rental” time frame instead of an “ownership” mindset. And for gosh sakes, don’t settle for “losing 15% when the market is down 25% and thinking you are a hero!

The stock market in particular is showing indications that it is ready to transition quickly from a decline to be hedged, to a bear market that can be exploited, the tools are there, the conditions are ripe. This is not a market to fear. It’s Winning Time! What are YOU going to do about it?