Fear sells

“We have been talking about it for five years and now it’s started,” he wrote yesterday. “How do we play defense, so guys like me don’t get creamed?”

Trevor (he’s retired) had just read a scary story about long-time (and 84-year-old) investor and fund manager Jeremy Grantham who this week forecast his 43rd economic and market collapse. Well, maybe it was the 29th. Hard to keep track. The email came to me while major markets were off a few hundred points and the S&P 500 sat 7% below all-time highs. (It’s still up 15.5% over the last twelve months.)

Grantham says stocks are in la-la land, bonds are bubbly, investors are crazy, central banks haven’t a clue and markets will lose 45% of their value, wiping out up to $35 trillion. The traditional B&D portfolio is a risk, he adds, telling people to buy cheap Japanese stocks, invest in emerging markets and load up on gold and silver. And, by the way, he has a fund that does just that.

Okay, time for a gut check. Are we in for a bruising?

Without a doubt, the world has handed us lots of stuff to fret about. The endless pandemic. Putin. Epic debt levels. The Robinhood app. Reddit. Crypto. NFT investing. Meme stocks. Tesla valuation. The supply chain. Adele. Inflation. Biden and midterm elections. Interest rates. Oh, and $2 million dodgy houses. Plus, throw in the polar vortex. And now hamsters are getting Covid.

Fear sells. These days it gets a lot of clicks. It pushes people into rash actions – as does FOMO. Emotion has never been the friend of investors, and there is none stronger than this one. Jeremy knows that. He’s a good marketer.

I asked my suspender-snapping, hot-car-driving portfolio buddy Ryan to run some performance numbers on Grantham’s 50-year career. “Key funds like his Benchmark-free Allocation Fund and the Global Equity Allocation Fund have greatly underperformed their stated benchmarks,” he tells me. “For example, the Benchmark-free fund delivered only 3.9% over the last 5 and 10 years, well below the 5% target return. Similarly, the Global Equity Allocation Fund returned 11.7% and 9.3% annually over the last 5 and 10 years, respectively, far underperforming the global equity markets. So history has not been on Mr. Grantham’s side, both from his dire predictions and returns perspective.”

In fact, back in 2018 Grantham told folks US markets would collapse and then (like now, he says) emerging markets were the place to be. But since that time the S&P has gained 68%, and the EM return is just 15%. So much for that call.

Okay, we all know the bad. How about the good?

The first thing to consider is that we’re emerging – albeit slowly – from a global pandemic of historic significance. Only a third of the world is vaxed. There is a huge amount of recovery and expansion ahead – fueling corporate profits and commodity prices alike. Employment has leapt back to 2019 levels, despite the virus still hobbling many industries. Company earnings have been peachy. The banks are crushing it. We’ve seen dozens of new record highs for markets over the last twenty months. Bond yields have risen, signaling inflation, not recession. Central bankers are about to restore interest rates and we not only have effective virus vaccines, but now pathogen pills to pop. The pandemic a hundred years ago killed 50 million when there were 1.5 billion people in the world. Now there are 8 billion people and 5.5 million have succumbed. We must not lose perspective.

“To be clear, we agree that the equity markets are going to be a lot more volatile this year as the Federal Reserve and other central banks hike interest rates,” says Ryan. “However, you have to ask yourself why is the Fed hiking rates? It’s because things are getting better, the economy is expanding, which is driving corporate profits higher, the main driver of stock prices. Additionally, we believe the pandemic will start to abate in 2022 as we transition to the ‘endemic’ phase, which if correct, could lead to big consumer spending as we return to normal and catch up on the things we’ve been deprived of over these last few years.”

Exactly. The reopening trade. As this pathetic blog has been yammering about for a year.

Now, Grantham’s no fool, just as he’s no prophet. Having exposure to value stocks and emerging markets makes sense. And that is exactly what a balanced and diversified portfolio does, as well as owning North American durables and technology, assets that rise with inflation and fixed-income exposure to dampen volatility. It’s also worth remembering markets only turn bearish (a drop of 20% or more) when an unexpected shock hits (like Covid 19 in March of 2020) or, more likely, we fall into recession. There is none on the horizon.

Here’s some more advice, from veteran trader Ed Pennock. “One of the hardest things for investors to do,” he says, “is nothing.”

When markets turn against you and you think you should be selling, it is important to ask yourself ‘why’ you are selling. Is it because you are scared of losses, or because fundamentals have changed? Other questions to ask yourself: Is your portfolio properly balanced? What is your time frame? Can you withstand some more losses without panicking? Is your income more than your expenses?  Sentiment and fear can get in the way of investment success. There is nothing wrong with doing ‘nothing’ in times like these. It is exceptionally hard, but most times turns out to be the right move.  Stay the course.

Remember that investing is not a race or a competition. Nor is it about hiding and protecting capital. Design your investments to contain risk, and keep your eye on those life goals your money is aimed at. Marriage. A house. Kids. Retirement. A Harley Davidson Softail.

And that reminds me. The best advice new motorcyclists get is not to look down at where you are on the road, but to gaze far ahead to where you’re going. Way more stable. Those who worry about the next fifty feet often land there. They fear. They fall.

Just ride.

NOTICE TO READERS: The blog architecture ate approximately 100 comments at 11 pm ET Friday. Poof. Gone. Somewhere. It’s sad, since those which agreed with me were brilliant. Apologies to everyone. – Garth

About the picture: “This is my executive assistant Sunny,” writes Lee. “She is our 8 year old mini-schnauzer who has brought so much sunshine into our family! She loves long dog-walks, chasing bunnies and crows and ensuring I stay on task while WFH-ing.”

16 comments ↓

#1 David McDonald on 01.22.22 at 8:54 am

I bought rib eye steak for a barbecue (at -25C) for the family. It was about 33% more expensive than last summer. Things look dire on the inflation front. On the other hand we can still afford steak on occasion and the barbecue worked fine in the snow. It’s a matter of perspective.

#2 Sunny South on 01.22.22 at 8:59 am

Although I agree with our esteemed blog host in principle, it is worth pointing out that 4-5 BoC interest rate hikes over the next 11 months would be considered a shock. An occurrence not seen since 2016/2017. Also if it were just one voice crying wolf, that could be taken with a grain of salt. However when multiple experienced people including the primary peeps from The Big Short are all crying wolf, may be time to take heed. No, don’t go to all cash or Japan, but time to secure some profits so you can buy any future dips that will occur.
I remember reading a story where a reporter asked a Sherpa whether he believed in the Yeti. The Sherpa replied that as with all things in life where there’s a choice to believe, it’s always better to believe. Just saying’.

#3 crowdedelevatorfartz on 01.22.22 at 9:14 am

An entire comment section bereft of Ponzie-isms
Bliss.

#4 Dharma Bum on 01.22.22 at 9:24 am

Life Goals:

Marriage. Check

A house. Check

Kids. Check

Retirement. Check

A Harley Davidson Softail. Check. (Heritage 2000)

So….

What now?

I pursue leisure. But not too much. My hours are between 11 am and 3 pm.

Other times I am usually in the process of sleeping, waking up, going to bed, watching movies and documentaries, drinking coffee, beer, or bourbon.

#5 Omicron Kenobi on 01.22.22 at 9:36 am

NOTICE TO READERS: The blog architecture ate approximately 100 comments at 11 pm ET Friday. Poof. Gone. Somewhere. It’s sad, since those which agreed with me were brilliant. Apologies to everyone. – Garth

____

No, I took away all those comments.

I am in charge now. Forever.

Omicron Rules.

#6 IHCTD9 on 01.22.22 at 10:02 am

#150 SunShowers on 01.21.22 at 3:26 pm
#146 IHCTD9 on 01.21.22 at 2:43 pm
“Man, you are waaaay behind the times homie.”

Lol my coworker operates a six-figure CNC router and it doesn’t do diddly-squat by itself.
He still has to program it so it knows what parts to cut for which finished units, the finished units still need to be entered into the program, and the raw material/finished parts still need to loaded/unloaded.
———

Well, I would not use a CNC router table as an example of current cutting edge tech. I’d use FANUC’s lights-out plant in Japan. It uses robots to build other robots human-free, and can run 30 days at a time unsupervised cranking out 50 new ‘bots per day.

It’s no secret human labour requirements have been decreasing for decades already. It’s going to keep decreasing. Eventually even our brain power will not be needed much anymore either.

#7 the Jaguar on 01.22.22 at 10:06 am

Garth’s old boss featured on the front page of NP this morning. The most interesting quote in the entire article however is from Jack Mintz and refers to one of the Jaguar’s big loves :

“Nigel is extremely smart and actually he was really an excellent chief of staff,” said Mintz.

Heavy sigh………..

#8 Virtual Ted on 01.22.22 at 10:19 am

“The best advice new motorcyclists get is not to look down at where you are on the road, but to gaze far ahead to where you’re going. Way more stable. Those who worry about the next fifty feet often land there. They fear. They fall.”

– very nice!

#9 ogdoad on 01.22.22 at 10:22 am

ouch, lost comments? Well, I could think of a few blog dogs who’s Saturday is now ruined…sorry.

I’ll give out free hugs today in support.

Og

#10 Ah Shucks & Golly Gee on 01.22.22 at 10:23 am

I never agree with you …. except today.

#11 Tony on 01.22.22 at 10:53 am

Grantham for the people who just don’t get it is saying interest rates in America will never be raised high enough to even put a dent in the inflation rate so the inflation rate in America will increase eventually tanking the U.S. dollar as the spread between the Fed funds rate and inflation widens. That’s why he saying to buy gold, silver and foreign stocks as well as commodities because in time they’ll tank the U.S. dollar.

#12 VladTor on 01.22.22 at 11:28 am

Garth! You lost comments. This is very sad! My comment was among the best – for sure!

If it is happen b’s virus I would recommend you to install antivirus prog. ZoneAlarm (ATTN- this is not antiCovid19..Ha-Ha–Ha) . One of the best! I’m using since 2004 and never ever complain. Free version available too. Company has a lot other useful products which can be useful for business.

#13 baloney Sandwitch on 01.22.22 at 12:43 pm

Grantham is a bit like the boy who called wolf, a bit too many times and people like Garth get tired of it and then mock him. The thing is the wolf always comes eventually and eats poor red riding. He did call both the tech crash and the GFC correctly. The guy is worth reading. He is saying that we are in a 3-sigma bubble at least in the US stock market.

#14 Damifino on 01.22.22 at 1:36 pm

#2 Sunny South

I remember reading a story where a reporter asked a Sherpa whether he believed in the Yeti. The Sherpa replied that as with all things in life where there’s a choice to believe, it’s always better to believe. Just saying’.
———————————

There was a time when human diseases were believed to be divine retribution for unholy behavior. Then Antonie van Leeuwenhoek discovered microbes. Interestingly, people were not in a hurry to alter their beliefs regardless of what became evident under the microscope.

Beliefs are unhelpful. Falsifiable conjecture, however, has done wonders for humanity.

#15 Grunt on 01.22.22 at 3:40 pm

I’ve heard wherever a Harley owner parks their wheels there’s a leak of some sort. Very nice ride though.

#16 Prince Polo on 01.23.22 at 7:52 am

NOTICE TO READERS: The blog architecture ate approximately 100 comments at 11 pm ET Friday. Poof. Gone. Somewhere. It’s sad, since those which agreed with me were brilliant. Apologies to everyone. – Garth

Equally sad is the lost job offer of becoming your head barista in Lunenberg.