Back To The Future…
Let’s imagine we had a time machine, but this time machine would only allow us to go back 90 days – that’s it. So, we jump in our time machine, pull the green lever, push the special purple button, and zoom off we go. We open the door and find ourselves back in the first week of September.
What’s grabbing headlines? What’s filling our social media feed? What’s the conversation du jour at the coffee shops? Politics. The country will spend the next 60 days wondering how this 2020 election would play out and how the balance of power might shift one way or the other. Anxiety was high, and uncertainty was rampant.
Now, let’s imagine we went around polling folks to ask what they expected a November stock market to look like? This was that exact November that was sparking so much angst – it was THE election month. I am sure you would agree that most of our conversations would revolve around a pessimistic outlook for markets in November. This was the consensus opinion leading up to November.
Luckily, we are from the future, so we know what did happen, “It was the best November for the Dow since 1928 and the best November for the S&P since 1950. It was the best month, period, for the Dow since January 1987.” (David Bahnsen, The DC Today). Quite polarizing when we begin to compare the expectations and the actual outcome.
Was anyone optimistic about November? Sure, but those voices belonged to the minority and were probably drowned out by the somber majority. What do we call this minority that refuses to follow the herd? We call them contrarians.
Markets are always pricing based on expectations. Markets don’t react to good news or bad news; markets react to better or worse than expected. Markets also tend to overextend themselves one way or another, often driven by excessive euphoria or excessive pessimism.
This is where contrarians come in to play. They dance to the beat of their own drum. They recognize these overextensions in markets, and they choose to take the other side of the trade. This does not mean they always adopt the non-consensus point of view; contrarians are patient and wait for the “fat pitch,” as they’d call it in baseball.
If I was to ask you who is the greatest investor of all time, what would your answer be?
** I will give you a moment to think about it **
For many of us, we answered Warren Buffett. Warren Buffett is a great example of a contrarian. Buffett has been investing for nearly 80 years (seriously, he bought his first stock at 11). He has established an investment philosophy, certain principles, and convictions guiding how he invests his money. His investing style may come in and out of favor, and it might not match the trend of the day, but Mr. Buffett sticks to his beliefs.
As of this writing, Buffett’s holding company, Berkshire Hathaway, trailed the market (S&P) year-to-date by double digits. That sort of relative underperformance is not what is typically expected from the man who’s seen to be the world’s greatest investor of all time. Another interesting fact I will note is that nearly 50% of Buffett’s publicly traded portfolio is invested in one popular technology company that happens to be up +60% on the year – this means the other half of his portfolio is having a very difficult 2020, as it has wiped away much of the positive attribution from his largest holding.
What does the greatest investor of all time do in this seemingly defeating time? Does he re-think his strategy? Change his approach to investing? No, Warren Buffett doubles down. Recent filings show that Berkshire Hathaway bought back a record $9 billion of company stock. This is what contrarians do.
NOTE: When a company buys back their own stock, it is usually seen as a message from the leadership team that they believe their stock to be undervalued based on current stock prices.
Investing Isn’t Easy
As I am writing this article, there are countless rookie investors out there buying and selling headline stocks and gloating about their performance. Saying things like, “This is easy money” or “I am crushing Warren Buffett this year.” There is an aroma of arrogance out there right now, I hear it often, and it scares me because investing isn’t easy.
It is easy to mistake luck for skill, and it’s easy to celebrate when things are going your way. But if you stay in the game long enough, you will have to learn to take the good times with the bad. As Bernard Baruch said, “The main purpose of the stock market is to make fools of as many men as possible.”
Here’s the problem. Those who start with a streak of good luck and stumble upon some sizable gains lead them to make bigger bets and take greater risks than they realize or can afford. Those who take a shot at investing, and by no fault of their own, have less than favorable timing; they will often swear off the stock market altogether and accuse the market of being a rigged system. Neither of these outcomes is ideal. Investing isn’t easy, and it demands patience. As Buffett says, “The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”
I hope today’s discussion reminds you of how humbling investing can be and how bad we as humans can be at forecasting. November was a record-setting month, and no one saw it coming. I am sure the month of November (hopefully) did not make or break your financial goals, but financial achievements are built on an accumulation of months like November. These surprises to the upside help us get one step closer on our journey to financial freedom, and yet for every November 2020, there is a March 2020 to express the opposing reality. This is why, regardless of how cliche it sounds, we must stay the course. What course, you might ask? That is the job of you and your financial advisor to define the end financial destination you aspire to get to and to develop a financial plan that maps out the path to get there.
I will wrap us up by thanking all of you for the incredibly kind notes I received in response to last week’s article, More Than Numbers. The words of encouragement and hearing about other folk’s grief journey’s just reminded me of how thankful I am for the community that has been built around Thoughts On Money. If you ever have questions or just want to say hello, please do feel free to email me at firstname.lastname@example.org.
… and I will be back next week with more of my Thoughts On Money.