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At the Money: Staying the Course · Masters in Business

0:00
Speaker 1: This is the podcast Spotlight Hour on Bloomberg Radio.
0:08
Speaker 2: There are countless factors that distract investors from their best
0:12
Speaker 2: laid plans. Markets go up and down, bad news comes out,
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Speaker 2: companies miss earnings estimates, Economic data disappoints, to say nothing
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Speaker 2: of the endless parade of geopolitical events. It's not too
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Speaker 2: hard to see why staying the course can be a
0:30
Speaker 2: challenge for investors.
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Speaker 3: We'll stay.
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Speaker 2: As it turns out, there are strategies that long term
0:40
Speaker 2: investors can use to avoid the pitfalls. I'm Barry Riddhelts,
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Speaker 2: and on today's edition of At the Money, we're going
0:48
Speaker 2: to discuss how to stay the course over the long run.
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Speaker 1: To help us unpack all of this and what.
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Speaker 2: It means for your portfolio, let's bring in Larry Suedrow,
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Speaker 2: head of financial and ECONO research at Buckingham Strategic Wealth.
1:03
Speaker 2: The firm manages or advisors on over seventy billion dollars
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Speaker 2: in client assets, and Larry has written or co written
1:11
Speaker 2: twenty books on investing. So Larry, let's start with a
1:15
Speaker 2: simple question. Investing is supposed to be for the long term.
1:20
Speaker 2: How hard can that be?
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Speaker 3: Investing is actually very simple, but that doesn't mean it's easy.
1:27
Speaker 3: And the difference is that markets go through tremendous gyrations
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Speaker 3: much more frequently than people think. On average, we get
1:37
Speaker 3: one month a year that could go down ten percent.
1:40
Speaker 3: We've had six big recessions in the last forty years
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Speaker 3: and major bear markets during those periods. When you get
1:48
Speaker 3: those big drops, investors tend to panic, They engage in
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Speaker 3: recency bias, think this will continue forever. To get that,
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Speaker 3: governments take actions to count to the problems, and they
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Speaker 3: panic and sell, and the evidence shows that results in
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Speaker 3: them underperforming the very funds that they invest in. And
2:10
Speaker 3: then the reverse is true. In bull markets, they get
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Speaker 3: over enthusiastic FOMO takes over and then they buy high
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Speaker 3: and then expected returns along he is, have a plan,
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Speaker 3: stick with it and do nothing.
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Speaker 4: Be a rip Van Winkle investor, just rebalanced.
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Speaker 2: So let's get into the specifics. What sorts of issues
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Speaker 2: do you see that getting the way of investors staying
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Speaker 2: the course? What are the big distractions that take them
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Speaker 2: off of their plan.
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Speaker 3: First thing I would say is recency bias is a
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Speaker 3: huge problem. Investors tend to project what's happened in the
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Speaker 3: recent past and definitely into the future. So for example,
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Speaker 3: today AI is hot, so they think AI will be
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Speaker 3: hot forever, and prior it might have been biotechnology or
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Speaker 3: dot coms, and that leads to them to react. The
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Speaker 3: second mistake is that they fail to understand that when
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Speaker 3: it comes to investing, five years is not a long
3:17
Speaker 3: time and ten years isn't even a long time, but
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Speaker 3: they think three years is a long time, five years
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Speaker 3: is very long, in ten years infinite. And the problem
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Speaker 3: is that you could go through almost every asset goes
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Speaker 3: through at least ten years of poor performance, and when
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Speaker 3: you get even three years, they panic and sell, where
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Speaker 3: Warren Buffett would be.
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Speaker 4: Telling you to be that sur buyer.
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Speaker 3: One quick example, three periods of at least thirteen years
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Speaker 3: with the S and P underperformed T bills twenty nine
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Speaker 3: to forty three, sixty six to eighty two, that's seventeen years,
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Speaker 3: and then twenty two thousand to twenty and twelve even
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Speaker 3: a forty year period where small cap and large cap
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Speaker 3: growth stocks underperformed twenty year treasuries. The riskless investment for
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Speaker 3: a long term pension plan.
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Speaker 1: What about market crashes?
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Speaker 2: Shouldn't investors get out of the way before the market
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Speaker 2: crashes and then jump back in after it's done.
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Speaker 3: Yeah, certainly if you could predict that. The problem is
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Speaker 3: there are no good predictors. One of the great anomalies.
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Speaker 3: I even wrote a book about this, Think, Act and
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Speaker 3: invest like Warren Buffett is. Buffet is idolized that people
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Speaker 3: tend to do not only ignore his advice, they tend
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Speaker 3: to do the opposite.
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Speaker 4: Buffett says, never try to time the market. But if
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Speaker 4: you're going to do so, be a.
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Speaker 3: Buyer when everyone else is panicking, and then be a
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Speaker 3: seller when everyone else is being greedy. A great example,
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Speaker 3: Barry in recent times was much of two thousand and
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Speaker 3: twenty recession.
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Speaker 4: If you had a perfect crystal ball.
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Speaker 3: We went into recession in the second and third quarters,
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Speaker 3: and the market bottom down well before that happened, and
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Speaker 3: the rest of the year the stocks returned, of my memory,
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Speaker 3: served something like fifty percent or something like that in
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Speaker 3: those next nine months, from the middle of March when
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Speaker 3: at bottomed do owt to the end of the year.
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Speaker 3: That's a great example of why you don't panic. People
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Speaker 3: forget that. Governments don't sit there do nothing. Central banks
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Speaker 3: come in, cut interest rates, government enact fiscal policies that
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Speaker 3: try to get out of the recession.
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Speaker 2: I've seen some data that suggests you just have to
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Speaker 2: miss the worst couple of days and your performance improves dramatically.
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Speaker 2: What's wrong with that line of thinking.
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Speaker 3: The odds of your identifying those days are close to zero.
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Speaker 4: That's what's wrong with that. And of course the other
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Speaker 4: side is also true.
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Speaker 3: A huge part of the returns happen over very short periods,
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Speaker 3: and yet it's virtually impossible predicted. Again, here's an anomaly.
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Speaker 3: Both Peter Lynch and Warren Buffett, maybe the two greatest
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Speaker 3: investors of all time, to investors you should never try
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Speaker 3: to time the market, and neither one of them has
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Speaker 3: ever met anyone who has made a fortune by trying
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Speaker 3: to time the market.
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Speaker 2: And I've also seen some data that suggests that those
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Speaker 2: best days in those worst days come clumped very close together.
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Speaker 2: So if you're fortunate enough to miss the worst day,
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Speaker 2: the odds are you going to miss the best day also.
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Speaker 3: Now that's because again governments take action, come in and
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Speaker 3: try to counter it, and then you know, everyone who
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Speaker 3: was panicked and sold now has to you know, unwind
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Speaker 3: those positions, and the shorts have to come in and
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Speaker 3: cover as the market starts to recover.
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Speaker 2: So forget crashes, nobody's really going to time those wells.
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Speaker 2: But what about recessions? What should investors do when a
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Speaker 2: recession is on the horizon and coming your way.
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Speaker 3: Anyone who's read my books and my blogs I've written
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Speaker 3: something like seven thousand now knows that I try to
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Speaker 3: tell people that you should make decisions based on empirical evidence,
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Speaker 3: not opinions like you hear on CNBC or a Bloomberg
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Speaker 3: or whatever from some guru. And the evidence is pretty clear. Barry,
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Speaker 3: I think this might even shock most people. We've had
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Speaker 3: six recessions since nineteen eighty. The market has bottomed out
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Speaker 3: before the recession was declared.
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Speaker 4: Four of the six times.
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Speaker 3: So even if you could predict when it would happen,
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Speaker 3: just like in twenty twenty, would have done you no good.
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Speaker 3: You would have predicted recession, got it out, and the
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Speaker 3: market took off.
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Speaker 2: So let's talk about performance. I know you crunch a
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Speaker 2: lot of numbers, and in the books of yours that
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Speaker 2: I've read, I always see a lot of data. The
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Speaker 2: people who just buy and hold and put it away
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Speaker 2: for twenty years, how well does their performance compare to
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Speaker 2: those people who were either trying to avoid a crash
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Speaker 2: or trying to avoid a recession.
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Speaker 1: What does the numbers say?
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Speaker 3: The research does show that the more people act, the
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Speaker 3: worse their returns are.
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Speaker 4: The more they trade, their.
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Speaker 3: Worse their returns are as they drive expenses number one,
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Speaker 3: and they pay more taxes.
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Speaker 4: That data is very clear.
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Speaker 3: Good studies by Terrence Odein and Brad Barber, for example,
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Speaker 3: have looked at that. In morning Star runs data showing
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Speaker 3: persistently that the investors earn lower returns and the very
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Speaker 3: funds they invest in, which means that they had simply
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Speaker 3: done nothing. They would have done better, but they'd done
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Speaker 3: even better than that if they rebalance, which would cause
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Speaker 3: them to sell high and buy LUW, not the reverse,
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Speaker 3: which is what they tend to do.
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Speaker 1: Just do something. Sit there is the best advice for those.
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Speaker 3: Two things you want to do. You don't want to
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Speaker 3: try to pick stocks at time the market. You want
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Speaker 3: to stick to your plan and that means you have
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Speaker 3: to act by rebalancing.
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Speaker 4: And the other thing.
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Speaker 3: You want to do is tax loss harvest to get
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Speaker 3: Uncle Sam to share in your losses when they do occur,
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Speaker 3: and they certainly will occur.
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Speaker 2: So let's talk a little bit about fear, and greed.
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Speaker 2: All of these things we're discussing often cause investors to
9:30
Speaker 2: become emotional or fearful. What do you do when you
9:34
Speaker 2: have a client who calls up and says, Hey, I'm
9:37
Speaker 2: not sleeping at night, I'm stressing over the market. I
9:40
Speaker 2: got to do something. You got to make the paint stop.
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Speaker 2: How do you advise those folks.
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Speaker 3: The only way to address this properly is you have
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Speaker 3: to have the plan in place in the first.
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Speaker 4: Place, so you have to be prepared.
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Speaker 3: Investors have to understand that investing is about accepting risk.
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Speaker 4: That's a good thing. Volatility is a good thing.
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Speaker 3: And the reason is it creates the big equity risk premium.
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Speaker 3: If stocks would always go up, then there'd be no
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Speaker 3: risk and the equity risk premium would disappear and you
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Speaker 3: get CD or Treasury bill like returns. So you want
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Speaker 3: that volatility. But the key is you cannot panic and
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Speaker 3: sell because that leads to bad results. So key is,
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Speaker 3: as I've written in my books, you don't want to
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Speaker 3: take more risks than your stomach can handle, because if
10:29
Speaker 3: you do, regardless of your knowledge of this and the
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Speaker 3: wisdom of the stay of the cost, your stomach is
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Speaker 3: going to scream when it reaches the GMO point, it's
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Speaker 3: going to scream, get me out, and you will likely.
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Speaker 4: Panic and sell.
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Speaker 3: Now that's what we see, and then it's never safe
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Speaker 3: to get back in. Never have I seen a day
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Speaker 3: in twenty my thirty years in this business where I
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Speaker 3: could say, gee, it's really safe to be an investor,
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Speaker 3: because we know there are all kinds of black swans
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Speaker 3: out there that can occur tomorrow, like COVID nineteen as
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Speaker 3: just one example, the Black Monday in eighty seven as another.
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Speaker 3: I mean taleb has written about this a lot, these
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Speaker 3: black swan events. They'll come up and markets crashed, and
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Speaker 3: you have to be prepared not only to do nothing,
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Speaker 3: but to be able to rebalance, so you get to
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Speaker 3: buy low like Warren Buffett.
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Speaker 2: So let's talk about the opposite of fear. Let's talk
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Speaker 2: about greed. What do you say to a client who
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Speaker 2: calls up and says, hey, AI is the future, and
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Speaker 2: I got to get me some of that. I don't
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Speaker 2: care what it is, Buy me a dozen different AI
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Speaker 2: companies because the train is leaving the station and I
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Speaker 2: don't want to be left behind.
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Speaker 4: Yeah.
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Speaker 3: Well, if it was that easy, then the vast majority
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Speaker 3: of professional investors who have now today PhDs, not only
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Speaker 3: in finance, but in nuclear physics, mathematics, they would outperform.
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Speaker 3: And yet the evidence is clear. All you have to
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Speaker 3: do is look at standard and poor spever results persistently
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Speaker 3: over the long term, even before taxes, over ninety percent
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Speaker 3: of the active managers underperform, and there's no evidence of
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Speaker 3: any persistence beyond.
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Speaker 4: The randomly expected.
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Speaker 3: So manager who wins the last three years, that tells
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Speaker 3: you nothing virtually about the.
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Speaker 4: Next three years.
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Speaker 3: So why do you think you're going to be able
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Speaker 3: to outperform? What advantage do you have over these geniuses
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Speaker 3: who get to spend one hundred percent of their time
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Speaker 3: doing it where you're doing it as a part time
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Speaker 3: you know, enjoyment. Maybe the odds are close to zero
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Speaker 3: you will succeed.
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Speaker 2: So to wrap up, invests who have a long term
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Speaker 2: time horizon that's not five years or even ten years,
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Speaker 2: but twenty years longer, should expect distractions along the way.
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Speaker 2: There are going to be recessions and market crashes and
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Speaker 2: geopolitical events. Investors need to understand that's just part of
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Speaker 2: the normal landscape.
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Speaker 1: Markets go up and down, but the.
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Speaker 2: Biggest Winners are those who stay the course and hold
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Speaker 2: for the long haul. I'm Barry Ridholts and this is
13:36
Speaker 2: Bloomberg's At the Money