10 Illustrated Truths About Investing & The Markets

Over the last eighteen months, stocks have whipsawed within a massive trading range as “trade wars,” “tariffs,” and monetary policy actions from the Fed have lit up headlines. Despite the strong rally from the beginning of the year, investors are no better off today than they were at the beginning of 2018.

Does this mean the bull market is over? Or, is it just a pause before a continuation higher? Has the Federal Reserve figured out how to “end recessions?” Or, has the low interest rate environment over the last decade spurred another credit bubble?

Honestly, no one knows for sure where we are within the current cycle, but it is understood it will end.

As a portfolio manager, I must stay invested during rising markets as our clients need returns in order to meet their investment goals. However, I must also protect that capital from major drawdowns which inflict far greater damage to financial goals than temporary underperformance.

This is a point missed by most individuals who take on far greater risks than they realize when chasing markets higher. It is also why we spend the majority of our time pointing out the relevant risks to capital.

Pointing out risks, analyzing those risks, and developing an “odds based” approach based on those risks is what guides our asset protection strategies within our long-biased portfolios. While ignoring those risks may lead to great gains in the short-term, the long-term destruction of capital combined with lost time is irreparable.

This is why we write the way we do. It is our “homework” behind our investment management strategies. Here are ten thoughts about investing and markets to consider. (I have provided links to relevant articles for more in-depth explanations.)

1. Markets are cyclical.  Bull markets are a process. Bear markets are an event.

2. Diversification has become less beneficial as markets have become highly correlated.

3. Follow the trend of the market. Have a simple method to define the direction of the trend and follow it accordingly. Being a bull during a bearish trend doesn’t work well.

4. We will all be wrong from time to time. Staying wrong is problematic.

5. There is no “law” that says you have to remain “fully invested” at all times. Sometimes, cash is the best hedge against uncertainty.

6. Understanding the real meaning of “risk” and how to control it always leads to better outcomes. Professional gamblers know when “not to bet” on a losing hand.

7. No one is right all the time. However, there are basic investing rules. that if followed. tend to reduce the loss of capital associated with being wrong.

8. The markets are driven by the “herd” mentality which swings from optimism to pessimism driven by headlines and narratives. Excess optimism and excess pessimism denote the points where the most money is lost or made.

9. Valuations do matter.

10. Understanding the importance of “time” is critical to investing success. While capital can always be regained, the loss of time cannot. 

These are just reminders to keep you grounded in the reality of how money, and investing, REALLY work over the long-term. While it is easy to get lost in the excitement of the moment, the brutal return to reality has always been a costly lesson to re-learn.