I recently lost my dad. It’s painful, we always discussed my blog of course, but what was most amazing was all the stuff that had to be dealt with. One of those things involved my parents’ investment accounts at Morgan Stanley. My dad had a good relationship with his Advisor. I met him once prior, and found him to be personable, smart, informed, and realistic. I realized immediately why my dad always said how much he enjoyed their conversations.
When dealing with paperwork, establishing new accounts, etc., I made it clear to him that no matter my background in markets, trading, advising, and teaching I have no intention of trying to tell him how to invest what is now my mom’s account. This was a worry of my mom, so I wanted to squash that one quickly. I continued to chat with David over the following days and weeks, and finally asked him, “Can you please explain new highs in the indexes to me? I just don’t get it!”…as evidenced by the obvious losing trade I wrote about previously. I told him I definitely don’t envy the position he’s in.
He laughed. He told me that many of his clients call as they watch this crazy rebound (my description) and wonder why he’s got any cash on the sidelines. How could he not have them fully invested? The line that stuck out to me the most was when he told me some of his clients actually feel like they’re losing money. After all, NASDAQ futures (I think in futures, old habits are tough to break) are up over 80% from the lows of the spring. E-mini S&P futures are up over 60%. So if your account hasn’t grown that much in the last 5 – 6 months you, or your advisor, are lagging. At least that seems to be the thinking of many investors, whether you’re considered a novice or advanced investor. Many of these people are even at the level of accredited investors which, by the government’s definition, means they have an understanding of market movements over time.
But is this a fair critique? I’m not sure. As I said in my last blog entry, many of the most advanced professionals I’ve spoken to, or whose opinion I’ve read, seem to have a problem understanding this rally on a fundamental basis. Being a chart technician, I should be bullish. Buy every dip. But I’m not. Neither are many of these professionals. As a believer that the market is always right, does that therefore mean all these opinions are wrong? Let’s examine a bit and you can draw your own conclusions.
The NASDAQ index is based on 100 stocks. The S&P 500? Eponymously named for the 500 stocks in that index (505 actually). I keep reading on Twitter that my 401k, if I actually had one, is screaming higher. I should be thankful for this recovery as it will cushion my later years. OK, then why can’t these advisors keep up? Well, a couple of reasons. One, it’s really difficult to call a bottom when it’s falling out from under us. And if you did call the bottom, what did you do about it? Most of these accounts are not trading index futures or even ETF’s; they’re trading equities, and that’s when it gets really hard.
The bulk of the S&P up move is centered around 5 NASDAQ stocks; AAPL, AMZN, MSFT, GOOGL, and FB (Facebook). Those 5 stocks have a Year-to-Date return approaching 50%. The rest of the S&P? Negative 3%. By another person’s measure, those stocks account for 44% of the up move. I’m guessing most professional money managers would not consider themselves to be truly performing their fiduciary duties were they to focus portfolios on only 5 stocks. That definitely isn’t the diverse holdings model that is constantly taught and hammered home. And we always seem to forget why these people are good at their jobs, even if they haven’t returned 60% – 80% over the last few months of this surrealistic world we’re living in.
I’ve tried to explain this to many people over the years who have pointed out that if you “Just buy an index ETF, over 10, 15, 20, 30 years you’ll make good money.” The problem with that statement is not only is it overly simplistic, it shuns human nature for most of the population. We’ve discussed corrections and why a 10% down move is a buying opportunity in a bull market. A 20% correction converts that same index into a bear market. The S&P e-mini futures dropped 36% in one month. That does not sound like a buying opportunity based on all the old rules. And we all know I don’t believe in a New Normal. At least not as often as we’re told they happen. We’re usually told by different experts each time, and this is not a new normal I’m willing to buy into (literally).
Double digit unemployment. Small businesses begging for another life line. And every time we’ve thrown that lifeline recently, we’ve done it in ways that devalue the US Dollar on the global currency markets. The argument can be made that even if you are making money, you’re making a lot less than you think you are. But that’s not the point I want to make. What I do want to point out, is that emotions drive most investment decisions that aren’t automated strategies. And even people using those computer models often want to override them when they don’t get the returns they want. They may be getting the returns they expect based on the research, but it still sucks to read on social media how much more money people are making than you. Personally, I think it’s like those Photoshopped vacation pictures. If you were having that good a time, or making that much money, you really don’t need to brag. We can all tell from your smile.
What we need to learn and keep in mind, is that a single benchmark rarely tells the full story. A long term strategy, be it fundamentally based or technically, has to have rules. And you have to live by those rules or else for all intents and purposes they don’t exist. Don’t look at someone else’s family pics on FB to decide if you’re happy. And definitely don’t believe the hype of how much money you should be making. Devise a plan, stick to it, keep your head down, and worry about your own money. That’s more than enough to think about for any one person.