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Good patterns for 2021

January 15, 2021

To kick off the year, let's take a look at the control board from the Chernobyl nuclear power plant:

Who could have predicted something would go wrong?

That interface mistake was repeated at 3 Mile Island in the United States, though the management structure, as well as idiosyncrasies of reactor design, saved the U.S. plant from total meltdown.

Human beings do not respond well to infrequent events in complex systems. Human beings do well when something is practiced over and over, like a pilot touching down a 737, a surgeon reconstructing a hip joint, or a cabbie just missing a bicyclist.

When you think about your investment goals, don't aim for the infrequent event. Let other people try to find the next Bitcoin or other bubble. You don't need the stress if it turns into a tulip bulb crash. Betting on infrequent events makes for good news stories but generally poor investing.

Instead, aim to create patterns. Regular, monthly savings into investment accounts is a good pattern. Not watching the financial news is a good pattern. Not picking stocks is a good pattern. Not assuming the market is wrong - also a good pattern (the market may be, but don't default to that assumption). This will help keep you out of the financial equivalent of Soviet reactor #4.

We have a lot of exciting things in the hopper for clients this year. Combined with these behavioral patterns, we see a bright future. Stay tuned.

Dan Cunningham

A final thought for 2020...

December 22, 2020

On March 17, 2020, I wrote in this newsletter:

"You will probably not exit this crisis the same person as the one who entered. You won't have a choice, so it's best to work toward accepting that now (it's not easy), be nimble mentally and assume life is going to change."

I said perhaps more than I knew.

For just one moment, let's look in the rearview mirror. On the investment side, the idea of a low-cost, well-diversified equity and real estate investment program protected by Treasuries sparkled. In March those Treasuries mobilized and rose, and if they weren't so ethereal, I know more than a few of our clients would have given them a giant bear hug. Then, surprising almost everyone, the equity world reversed and roared out of the bottom with large cap stocks taking the lead. Tech stocks collectively drank a bathtub of Red Bull and blew out the market top. And then in the fall leadership rotated to small cap stocks, and they broke monthly gain records.

It was enough to give you whiplash as an investor. But it proved one investing concept after another. And in that purely financial sense, if you were invested well, it was symphonic.

Each year at the close I write down the biggest lesson I learned. This year there was no contender to the trophy: The Power of Narrative ran away with it. Whether it was medicine, politics, or finance, numbers didn't stand a chance against stories. This is a known characteristic of the financial world: Nobel Laureate Robert Shiller's latest book bears the title "Narrative Economics." (Always good idea career-wise to write a book that might found an entire field.)

The human mind doesn't work on numbers. It works on stories: they are memorable, emotional, and, frankly, partial. Narratives trigger not only interest but fear and greed. They fit neatly into people's pre-conceived notions, giving them fuel to spread. They make the world exciting and maddening. They are Kodachrome.

Folks, 2020 is just about done. 2021, we await you. We anticipate you. We beg you to come.

Dan Cunningham

The dazzling stock market of November 2020

December 4, 2020

Oh November! A few November market notes:

  • Small capitalization stock indexes had their best month ever (since the Russell 2000 began in 1979).
  • Value stocks had their best month ever. (since the Russell 1000 Value was created in 2000)
  • The gap favoring value over growth was the widest in 20 years.
  • Equities worldwide posted their largest gains since 1988.
  • Big tech got hammered relative to small caps, underperforming by over 12% in a month.

Keep in mind, this is a one-month period, which doesn't mean a lot, except that it's important not to miss one-month periods like this as an investor. To see graphs of this data take a look at this Bloomberg article.1

Even more interesting is that the value of asset diversification showed up. It pretty much drove a parade down main street.

You may be wondering, what is going on here?

Many restaurants and in-person venues closed, economies in partial lock-down, Covid raging, schools on life support, and the stock parade marches upward?

Remember, these things impact the market:

  • Markets look forward, and they price themselves based on the future. The market is pricing itself, arguably, where it thinks the U.S. will be next summer. With American and worldwide personal savings at high levels, people ready to explode from their houses, and success of a vaccine program looking like a high probability, the market thinks the economy is going to rip in 2021.
  • The government is signaling that it is going to print and distribute more money. Lots of money for free! (What could possibly go wrong?) Markets love the printing press, as a portion of that printing ends up in their coffers. Politicians have learned to love it too - it's like Washington should be renamed Gutenberg.
  • Everything in investing is relative to the risk-free rate, and the risk free rate bar is so low you'd have to try to trip on it. This is important. As investors perceive low returns in the bond market, they move capital elsewhere. Stocks look more attractive if their competitors for capital appear weak.

Even perma-bear Nobel laureate Robert Shiller argues here that stock prices may not be high. Which may be the case. Or, based on Shiller's reversal alone, one could hypothesize the opposite.

Dan Cunningham

1 Data is from Bloomberg: It's Been Amazing: November's Record Moves in Charts 11/30/20
2 Small capitalization reference above is Russell 2000, Value stocks are Russell 1000 Value. One Day In July tends to use similar but not exactly these indexes. See Bloomberg source above for details on performance sources.
3 Big tech reference is: Amazon, Facebook, Apple, Microsoft, and Alphabet.
4 St Louis Fed - Personal Savings Rate

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