OT: how to be successful in a bull & bear market

[Inspired2learn]

Thanks a lot Tecmo! This is very helpful. It is wonderful to see this portfolio…and the fact that you have a cost basis of MSFT at $35 per share and AAPL at $23 per share tells me how you have crafted your portfolio, by choosing some of the best very early on and managed to hold on these amazing winners…And equally important, you never let the greed overtake your good sense, and have majority of your money in the index funds and BRK…

And yes, I am constantly on this board trying the learn from the wisdom of Jim and all the posters. Thanks for telling me about the Falling knives board and I will be sure to look into that as well. Hopefully lady luck will smile on me soon.

Once again, thanks so much!
Charlie

[said2]

I think it’s potentially very dangerous to advise somebody who just lost 75% of his wealth (with SaaS, as Chompin found).

Especially to tell him it’s not impossible SaaS might become a multi-bagger again or that more general investing in young growing companies often results in those.

Or to point him to the falling knifes board and the results with DLTR, DG etc. Or to tell him GOOG should become…

Etc. etc.

This is no criticism on the facts King, Tecmo or others present. Of course factually they are totally right, and I understand they are saying that mainly in response to the poster’s option 2:

I think I would put 3/4 into the option 1, and allot 1/4th into option 2.

I mean it simply psychologically, trying to put myself in his shoes. Even if saying nicely and apparently absolutely reasonable this:

While the 3/4th portion of the portfolio would hopefully provide a solid foundation for my children after 20 years, I am praying that the 1/4th helps me to a faster recovery, and just about help me to gain back my self belief

there will be the tendency to violate those good intentions to recover faster from such a Desaster — especially when that nice sounding strategy seems to fail for a longer time, to use force and to “double down”, with the 1/4th becoming more and more etc. Good intentions are one thing but…

I might be wrong as my English is not native and not that great, but the 2nd part of “to gain back my self belief” seems to be linked to the speculative 1/4th. If this interpretation is correct and having success with that part mentally is required, it’s evidence for “fatal attraction”, a recipe for doom.

Giving financial advice comes with a huge responsibility and one should be extremely careful (see Jim’s post) and also sceptical towards nice words and intentions. It’s human to have illusions about one’s own nature and about what one will do in this or that case.

Sorry if this sounds harsh.

[bigshan]

This is my personal experiences. I encountered three times when my total brokerage accounts value dropped more than 50% from recent peak. The first is around 2000-2002 before I followed value investing approach, I took the loss and sold everything, including Apple, which alone would have nearly doubled my current asset if it had been hold. The second is 2008-2009 after I had learnt everything about Warren Buffett and value investing for about 5 years. I hold on to everything and it turned out good. During this period and up to 2015, my performance outperformed index by about 2% a year. The third time is 2020, I again hold on to major holdings, sold some and bought some with margin debt, again it turned out good and I have sold significant amount to have 20% cash. In the past 15 years, my performance probably matches the index.

[mungofitch]

I think it’s potentially very dangerous to advise somebody who just lost 75% of his wealth (with SaaS, as Chompin found).
Especially to tell him it’s not impossible SaaS might become a multi-bagger again or that more general investing in young growing companies often results in those.
Or to point him to the falling knifes board and the results with DLTR, DG etc. Or to tell him GOOG should become…

A good observation.
I think they key here is that what is likely of most use to the poster is not some stock tips and tickers, no matter how good they are.
What is more needed is a general approach to investing which suits the writer’s situation.

Not that I have one to propose.
A good answer to that question would require some more inputs, not suited to a public board.
How many years more of saving does the person reasonably expect, and how many years of retirement?
What other assets are there? How is the balance between expenditure and income going?
How much time might be available, and suitable, to devote to learning and practising prudent investing?

Absent that, all one can spout is homilies, which would be of limited use.
The homilies you get depend primarily on who you ask, not what you ask.
I’d probably spout things like this:
No bonds, or bond-like things. Don’t reach for yield.
No cash “substitutes”. Don’t reach for yield.
Don’t own things you yourself believe are overvalued.
The same old blather that I ramble on about.

So much for the good advice. What about bad advice? That’s more fun.

Is there a prudent way to be speculative and greedy? Maybe.
I don’t have any problem with wildly speculative positions, but they should in aggregate be a position size commensurate with their likelihood of going poof.
For some people, a “barbell” strategy works well.
The absolute extreme of a “barbell” strategy would be something like 99% T-bills and 1% lottery tickets.
Preferably lottery tickets with a positive central expected return! (upside return times upside probability > downside loss times downside probability)
Certain call options might fall into that category.

There’s a nice fellow on the Mechanical Investing board who runs a separated portfolio like that, and has run essentially the same method for over 22 years.
(he did go to all cash for a short while, I believe, and later on added a basic market timing signal for when to be more conservative)
He aims for 2/3 cash and 1/3 out-of-the-money call options against stocks picked mechanically.
Each month he invests 1/9 the portfolio value in positions to be held for 3 months.
Frequently the call options expire worthless, causing huge drawdowns, which is what the cash is for.
But even with most of the allocation to cash, the portfolio has had a CAGR of 16.7% since inception.
The average return on a single option position held for 3 months has been about 20% in three months, non annualized, across about 900 positions.
That sounds great, but an average hides wild variability. A few dozen positions were -100%, and they weren’t randomly distributed through time.
But…16.7% for over 22 years is pretty good. Especially as it started in November 1999.
That’s about 10%/year better than the S&P, enough to put him in the superinvestor category;
that portfolio has about 8 times the balance that it would have had invested in SPY.
Again: an average can hide wild variability. It was NOT an easy ride.
The reason I mention this approach is the potential utility of a barbell approach.
Sometimes a mix of a lot of super-conservatism (cash) and a little bit of craziness is more useful, overall, than 100% conventionality.

Jim

[Inspired2learn]

Hi Said2,

No, not harsh at all…I know you mean well.

I lost 75% only because of my folly. Like I said, I was Naive…I placed my full trust in Stock advisor and those were the only companies I bought. Companies like Zoom, Fiverr, Lemonade, novocure, Etsy, and so many others that were recommended by Motley fool were the ones that had contributed to my downfall. Upstart was indeed one of the biggest folly of all, but Tom Gardner absolutely was convinced when he pounded the table on it, and said 380 was just a beginning. Yes, Saul’s boards were also euphoric about it, and I think another investment letter by Bert hochfield also said the same…So, I thought with UPSt I had 3 separate groups being extremely bullish…Alas, turned out to be wrong.

However, I do realize now that the macro trend is a key player and only solid appropriately valued companies with good cash flow will do well in this environment.
So, in that sense, I hope companies like Berkshire, Google, apple, Or Dollar tree, will do reasonably well… Most importantly, the one thing I secretly desire is, not having to panic if stock prices go down… And in these companies, I feel I am getting that confidence.

I am not going to say anything wrong about the stock advisor or other boards, as I alone am responsible for my actions. Let’s just say that I am not able to stomach companies, not just one, but more than a group of 30 stocks, all falling in excess of 75%. However, I feel with Jim and others, I don’t see anything that falls in that category. And even more importantly, if, god forbid, it falls down significantly, I have a feeling that everyone in this group will be buying such drops rather than selling…And That confidence is what I am seeking…
I think that is the philosophy that is being taught here.

Oh, with the 1/4th option, I don’t think Jim and the others are going to suggest throwing them in “hopefully to moon” options…I sense those are reasonably calculated sensible aggressive strategies,… The one thing I have in my side is time…I have no need for the money as my wants are extremely limited…I just want to be able to provide a good nest for my children in 20 years time…

Thanks again,
Charlie

[Inspired2learn]

Thanks so much bigshan for sharing your experiences. This is very helpful…as it tells me, that as along as one invests in reasonably good companies, and have a long time horizon, they can expect to do well.

I have a long time horizon (no need to sell or immediate use of money)…and so I just need to ensure that I become a better investor.

Thanks again,
Charlie

[Kingran]

This is no criticism on the facts King

I have not provided any specific stock advice. Rather, talked about understanding oneself, risk mitigation, etc.

[Inspired2learn]

Thanks again Jim! I completely agree with everything you have said.

You had mentioned “What is more needed is a general approach to investing which suits the writer’s situation…A good answer to that question would require some more inputs, not suited to a public board.”

I respect that and will send a separate response…but broadly, I hope to work for at least another 20 years.

I live very frugally…Like I said before, I (and my wonderful better half) truly have very limited wants and save mostly for the kids futures…which is why my current situation stings a lot…

But I am fortunate to have a very supportive family!

My good wife is always an optimist…and apart from comforting me, goodness me, she is even able to say “Well, look at the bright side…what if you never invested for another 20 years and simply kept it in the bank, and then invested like this, and lost so much…“That” would have been a disaster”

So, my desire now, is simply to accept my mistakes, learn the various ways of investing, and become more successful.

Thanks again,
Charlie

[JeanDavid]

This is very helpful…as it tells me, that as along as one invests in reasonably good companies, and have a long time horizon, they can expect to do well.

There was a time, back when Dogs-of-the-Dow and Foolish Four were popular, that some at The Motley Fool were discussing Unemotional Value and Unemotional Growth portfolios. It was then that I realized I was an emotional investor. And this was around the time I had bought a (very) few shares of BRK.A. I could have bought one more had I the nerve to buy one more of those shares, but I did not have the nerve to put all my eggs in that basket. And that was a long time ago.

Now lately, I have become more emotional about inflation, and have put more and more of my capital into precious metals; though still less than 10% of my capital. I do not expect my purchasing power to go up with the precious metals, but it might remain the same even if the US dollar price of my other investments goes up and the purchasing power of the US dollar continues to fall.

On the other hand, every year my time horizon necessarily goes down by a year. It might not go down quite that much if I quit smoking or something like that, but that is not an option because I never smoked. But you get the idea.

So since my time horizon gets shorter and shorter, my inflation worries should go down. But they don’t. So that is the real emotional content of my investing. I do not have the nerve to go all precious metals, since in the short term, their dollar price is completely irrational. If I knew I was going to die this year, there would still be no problem, but I doubt this is going to happen.

I seems to me that it depends on what the money managers at the US treasury and the Federal Reserve do that matter most, and who knows what they are going to do. But I do not trust them at all.

[tecmo]

This is very helpful…as it tells me, that as along as one invests in reasonably good companies, and have a long time horizon, they can expect to do well.

I would correct that. But predictable business at a reasonable price is the lesson learned.

tecmo
…

[mungofitch]

On the other hand, every year my time horizon necessarily goes down by a year.

Hey, cheer up. it’s better than that.

The life expectancy at age X+1 is not a year less than the life expectancy at age X.
That’s because you are known to have survived the entire first year, something not yet known when you were at age X.

Heck, at a certain ripe old age, your odds of dying in the subsequent year stop rising.
They are high, but they stop getting worse they have been through most of your life till then.

Speaking of inflation and portfolios of old people—
Something I mentioned in passing on another board:
My recommendation to my lovely spouse on my demise for a do-it-yourself income portfolio that’s inflation protected:
Put the entire portfolio into Berkshire, RSP, QQQE, in specific proportion. Maybe I’ll suggest a fourth or fifth position, maybe not.
Each quarter, spend all dividends received.
Each quarter, also sell 1% of the original share count of each position, and spend that too.
Income will vary, but should rise over time faster than inflation. There are brokers that will do this for you.
By definition it runs out of money after 25 years.
(A little money put into a 25-year-deferred annuity should take care of that issue;
for a 65 year old female, maybe $1.30 up front for each $1 in future annual nominal income.)
Random check–had one started this with all Berkshire in Q3 1999 when it was very pricey, the rolling year income would have risen so far by inflation + 7.4%/year.
Had you done it with SPY, real income would have risen inflation + 1.75%/year. Any positive number is good.
Note that the S&P didn’t rise in real terms for 1/6th of a century from its March 2000 high. Dividends were it.

Jim

[JeanDavid]

The life expectancy at age X+1 is not a year less than the life expectancy at age X.
That’s because you are known to have survived the entire first year, something not yet known when you were at age X.

I do not dispute that.

Heck, at a certain ripe old age, your odds of dying in the subsequent year stop rising.
They are high, but they stop getting worse they have been through most of your life till then.

True enough, but that is only the odds. If I were God or omniscient I would know what day I am going to die. And that day does not change. So every day I get closer to it. And that is the day I need to know to decide on my investment strategy at this stage. And this is the day I will not know. So while my strategy must be based of the odds, nonetheless each day I live brings me one day closer to the day I die.

I currently spend more than my income from my defined benefit pension and my social security. Some of that comes from investment income but some also comes from burning up some of the principal. Ideally, I should reduce my expenses to avoid ever using up the principal, but I do not have that much. I could not skip my property tax, my medical insurance and medical bills, … Also, my pension is not indexed at all. And the social security does not go up anywhere near what my expenses do.

What if my pension is underfunded, even if, by law it is adequately funded? What if the Social Security is underfunded? What if the U.S. government defaults on its bonds? What if real inflation rate goes up to 10% for an extended time?

[Kingran]

If I were God or omniscient I would know what day I am going to die

If you are god, there is no death to you.

[beginner3388]

Dear Inspired,

I understand your pain. Sorry. I also understand you desire to get right. Take it easy. You are young and in the right place to learn. Even Charlie and Warren have made big mistakes.

Warren, himself, suggested that the best way for a novice to learn about investing is to read, The Intelligent Investor. I’m reading it now for the second time. He said it changed his life. He changed mine.

Jim’s advice to read all the annual letters is also a good way to add to your investing library.

I would also suggest you read, Damn Right, to get a good view of Charlie. Warren Buffett Speaks, is a simple and fun overview of Warren’s thoughts. There are many other books about Buffett and Charlie. Hagstrom’s book, which I haven’t read, and Alice Shroeder’s, Snowball, which I have. Many more.

You might also read, Extraordinary Popular Delusions and the Madness of Crowds, having had a little experience of that, lately, right? Also, read The Internet Bubble, Living Within Limits, and, Influence, to get ideas of books Charlie liked in the past.

Charlie likes to say, investing is a subset of worldly wisdom, so one should develop a latticework of mental models from the various disciplines. He especially likes physics. He says some accounting is useful. Of course, logic. And stoicism is very important to him.

Another technique Charlie uses is to invert. For instance, Charlie might say to you, instead of trying to get rich, think of all the ways to lose money and then don’t do them. Don’t try to be smart–just try not to be stupid. He said when he was a meteorologist in the service during WW2, his task was to keep the pilots alive on their sojourns. Instead, he thought of all the ways that he could kill them and then stayed the h377 away from those.

Learn the difference between investing and speculating. Do you trust the person in the mirror? Instead of getting your confidence back, attain a healthy humility.

Warren says, get rich slowly. He sites the first law of money as, don’t lose money, and the second law of money is don’t forget the first law.

It takes a lot of work to learn all the mental models required to become a good investor. It’s really hard to become a good investor. Really hard. Plus you need the right temperament. Can’t be a gambler because that is not investing. Someone compared trying to be an investor to getting a medal in the Olympics. More people try it and think they can do it.

Benjamin Graham said something like, it’s not so hard to do better than the indexes, but to do very much better is very hard.

So, relax. Stay safe. It takes time to get time. Takes experience to have experience. Be humble, be honest with yourself. Be patient. Whatever you learn here will help you on your journey. Good luck.

P.S. There are great people in the world. Warren and Charlie are two. And there are quite a few here, as well.

[Inspired2learn]

Thanks a lot for these kind words! Very wise words indeed, and you are no beginner, beginner 3388):

The truth is I have always had a lot of humility and have always been humble…And I was never a gambler, and had taken it to the extreme, and stoically stayed away for a very, very long time from stock investing. Yet, completely agree that this experience has been very humbling. My panicking, and putting money when some of those horrible stocks went down by just 5 to 10% can be construed as gambling, an action borne out of hope rather than any degree of conviction. Also, one thing that I am totally guilty of was a lack of awareness of what stock market is, and how people can become rich or poor based on one’s poor decisions. This lesson has been unbelievably expensive, hard and heartbreaking! However, I have much to live for and determined to right the wrong.

I have already started reading Mr. Buffet’s annual letters, and bought the “Intelligent Investor” - on page 7, annual letter 2011, he states “Picking up that book was one of the luckiest moments in my life.”
Hopefully, it becomes mine too!

Thanks so much,
Charlie

[beginner3388]

Good start, Grasshopper.

I came for the money and stayed for the wisdom.

Sometimes I wince at the mistakes I made and still make. I should know better!

We are human.

Warren lost several times in airlines. Then he vowed never to buy another.
Until he did, big time. But Covid happened and he lost, again!

Doh!

He’s still doing pretty good, though.

Those things keep you humble and re-remembering Law #1. Like CS Lewis said, we are part spirit and part animal (intellect and reaction?) and we vacillate between the two. If you ever think you are all one or the other–beware.

[beginner3388]

I meant to say, we “oscillate” between the two.

[kmb123]

I lost 75% only because of my folly. Like I said, I was Naive…I placed my full trust in Stock advisor and those were the only companies I bought. Companies like Zoom, Fiverr, Lemonade, novocure, Etsy, and so many others that were recommended by Motley fool were the ones that had contributed to my downfall. Upstart was indeed one of the biggest folly of all, but Tom Gardner absolutely was convinced when he pounded the table on it, and said 380 was just a beginning.

This statement kills me. I found the Fool in 1999, still in its infancy with a very humble goal: Financial advice for the non-finance professional. For ex, explaining interest rates, how to find a stock brokerage, pay off debt, use care with credit cards, etc.

Then in approximately 2000 or 2001, before the Gardners started their newsletters, the Fool had an in-depth write up of a gene-mapping company called Celera. The next day, the stock went through the roof. It was obvious the Fool had an audience, and that their narrative could move prices. Shortly thereafter came the Rule Breakers letter, with many more to follow. Unfortunately I think they began a shift in purpose away from teaching wisdom to hyping performance.

The OP - in my mind - was already quite the success: Saving $1.2MM without using the stock market is impressive. I only wish he’d stuck with what was already working rather than reaching for outsized gains.

[Inspired2learn]

Obviously, I don’t want to do anything remotely rash. However, I am sincerely hoping to get some advise on a few things.

1. I have already sold many stocks which I had no conviction, and have a 400k real loss. The ones I sold were real stinkers like Lemonade, Fiverr, SFIX and many more like that. I am assuming that I can only write off 3k per year as tax loss?

2. More importantly, I still have many companies that I don’t have much conviction in. I didn’t sell them at the same time as others as I placed them at a slightly better category (good growth, horrible price valuation). And also did not want to do anything rashly and wanted to phase out my selling…however, now I am wondering, whether I should sell them or not…From a tax loss perspective, I am assuming I will be absolutely gaining nothing from selling these at such a low price. Having already a 400k loss means I will never ever be able to write off even 100K at a pace of 3k per year. So, is there any point in selling any more? Or am I clouding my judgement with tax issues instead of selling them?

3. Perhaps most important of all, what to do moving forward in terms of regular investing. Is it best to just to save them as cash till the stock market starts showing signs of recovery? Or is it best to keep regularly investing in the good companies/index funds every month? This is money for my childrens’ future, and so I don’t need them anytime soon.

4. Based on nothing but hope…this was my line of thinking…Don’t sell anymore, unless the loss is reasonable…and decide whether to invest regularly in good companies/ index funds versus saving the cash, and waiting for things to fall more and then buy…

Thanks a lot,
Charlie

[RAS337]

I have already started reading Mr. Buffet’s annual letters, and bought the “Intelligent Investor” - on page 7, annual letter 2011, he states “Picking up that book was one of the luckiest moments in my life.”
Hopefully, it becomes mine too!

Inspired2learn, just a word of caution: Some of what Benjamin Graham wrote in The Intelligent Investor is from a bygone era, so keep that in mind as you read the book–you may not be able to apply some of the lessons or formulas directly in today’s market. It is widely acknowledged that even Warren Buffett evolved beyond pure Graham-style investing (in the “cigar butt” sense) many decades ago. The two chapters of the book that are probably the most timeless–and that Warren Buffett has specifically called “the bedrock of [his] investing activities for more than 60 years”–are chapter 8 (The Investor and Market Fluctuations) and chapter 20 (“Margin of Safety” as the Central Concept of Investment). See https://www.forbes.com/sites/schifrin/2013/06/05/two-book-ch… https://seekingalpha.com/instablog/6645791-clearview60/53623…. (I believe chapter 8 is where Graham introduced the concept of “Mr. Market.”) So I recommend paying especially close attention when reading those two chapters.

I’m sorry to read about your losses and wish you all the best in your quest to learn more about investing.

Andy