On staying all in versus trying to time the market. And what really happened in 2008.
I really like this quote from tamhas:
There were a bunch of people who came through the great recession just fine by doing nothing. In many cases, people who were hurt pretty badly were those who sold late, thereby realizing losses, and then bought back in late because they were spooked. To be sure, there are those who were hurt, even if they kept what they had, because the companies were ones which either didn’t recover or took a long time to recover because they were particularly impacted or even a part of the problem.
For my part I don’t know anyone who stayed out when the market was dropping in 2008 and then bought in at or near the bottom and made a killing that way. I say I don’t know anyone who did it, I actually have never even heard of anyone who did it. I’ve never even heard of anyone who claimed to have done it. It sounds great in principle, but it doesn’t seem to happen.
Why is that? I know that at the actual bottom, in November 2008, it was total panic! Almost everyone who was a source of wisdom was saying, “This is the real crash! Get into cash!” Anyone already in cash was saying, “I’m staying out!” or “I’ll wait and buy at the bottom.” And then when it started up they didn’t believe it. Felt it was a false start. And it moved too fast. Then when it was suddenly up 20% they waited until it would go back down to where it was.
What I had been doing was what I’m doing now. Selling things that were more stable and wouldn’t have much chance of a bounce when it turned around, and buying good companies that were falling without any good reason. Again, I had confidence that it wasn’t company specific because almost everything was falling.
In November 2008 it was so bad that even I was starting to feel panicked, and considered selling. I thought about it and said to my wife, “If even I am thinking of selling, there’s no one left to sell. This has to be the bottom!” It was.
Now some people feel that they will do better by preserving capital and staying largely in cash. I just read, “I will buy back in when the tide turns.” And they believe that people who stay in will have to wait forever to get back to where they were. More power to them. I hope for them that it works for them.
Here’s what ACTUALLY HAPPENED in 2008: What happened in 2008 was that the bottom was on November 20, a Thursday. I was up 5.8% from the bottom the next day! Friday! I was up 21.4% from the bottom by the next Friday, the 28th! This was just four and a half trading days from the bottom, because of Thanksgiving! It happened so fast those people waiting for the bottom didn’t have a chance to “buy back in when the tide turns”, even if they realised it and believed it! I finished the year up 19.8% from my bottom, and in 2009 I was up another 110.7% on top of that - for a total of a combined up 152.4% from my November 20 low.
Now go back and reread those two paragraphs! Several times!
And consider that that was with an actual breakdown of the economic system, with companies like Lehmann Bros and General Motors going bust, and other big banks having to get bailed out. We don’t have that kind of a situation now. China may or may not be seeing their growth slow, but our economy is growing slow and steady, with rising employment, falling unemployment, and low interest rates.
I’ll close with a small quote from that wonderfully thoughtful Howard Marks article that someone posted a few posts back:
So what about the likelihood of another 2008-style crash? The bottom line for me is that a rerun of the Global Financial Crisis isn’t in the cards:
• • We haven’t had a boom (either in the economy or in the stock market), so I don’t think we’re fated to have a bust. Because most businesses have been particularly loath to expand their facilities, I don’t think they’ll be slammed if revenues flatten or turn down.
• • The leverage in the private sector has been reduced. This is particularly true of the banks, where leverage has gone from the region of 30+ times equity before the crisis to very low double digits today. And, of course, banks are now barred from investing adventurously for their own account.
• • Finally, the main villain in the crisis was sub-prime mortgage backed securities. The raw material – the underlying mortgages – was unsound and often fraudulent. The structured mortgage vehicles were highly levered and absurdly highly rated. And the risky tranches ended up in banks’ portfolios, causing them to require rescues. Importantly, this time around I see no analog to sub-prime mortgages and MBS in terms of their combination of fragility and magnitude.
I don’t mean to suggest there aren’t a lot of things to worry about: swollen central bank balance sheets; complete ignorance as to how they will be unwound and how interest rates will be moved higher; the seeming inability to generate economic growth and inflation; and the many other macro negatives listed earlier. A hard landing and substantial devaluation in China, the world’s second largest economy, certainly could have far-reaching effects.
It’s important that investors (as well as economists) avoid using words like “always,” “never,” “will,” “won’t,” “has to” and “can’t,” and I try to do just that. But it’s my view that the Global Financial Crisis and its preconditions were highly unusual, and I don’t think we’re heading for an encore. Remember, however, that I’m not a seer, and Oaktree and I never bet heavily on opinions regarding the future – mine or anyone else’s. My conclusions are the result of my reasoning, applied with the benefit of my experience (and collaboration with my Oaktree colleagues), but I never consider them 100% likely to be correct, or even 80%. I think they’re right, of course, but I always make my recommendations with trepidation.
It’s absolutely the same with my opinions. They are just my opinions.
Saul
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