The Longest Yard
Winning a Super Bowl is a difficult feat. Ask the Cleveland Browns, the Buffalo Bills, or any of the twelve teams that have never hoisted the Lombardi trophy in triumph.
On February 1st, 2015, the Seattle Seahawks set out to accomplish the rare achievement of back-to-back Super Bowl victories. Trailing 24-28 with just 26 seconds on the clock, the Seahawks found themselves on the Patriots’ one-yard line. At that point, the team could just about taste the victory. The players were prepping for the celebration, and the coaches were awaiting their Gatorade baptisms.
This moment would go down in football history as one of the most questioned play calls of all time; a total head-scratcher of a call. On second down on the one-yard line, the great Pete Carroll placed his quarterback in the shotgun – a position that often results in a pass versus a run. Ignoring his all-star running back, Marshawn Lynch, quarterback Russell Wilson took a quick snap and then threw an interception he’d never forget.
At that very moment, the Patriots’ undrafted rookie, Malcolm Butler, would steal the pass, steal the show, and cement his name in the history books of the Super Bowl.
Life is Full of Choices
And just like that, one simple decision – pass or throw – may have very well changed the entire outcome of a game.
Football, life, and even investing are full of binary game-time decisions. These decisions leave us to deal with the consequences, and for some, they mean no Super Bowl ring. Perhaps former Patriots safeties coach Brian Flores said it best: “A lot of times, your entire season comes down to one yard, one play.“
We will never be able to see how the outcome may have changed if Marshawn Lynch had been given the pigskin to pummel his way to the end zone. We are simply left asking, “What if…”
In the world of football, and many sports, game film is used to teach, reflect, and prepare. In the world of investing, we can use game film to actually answer those “what if” questions.
Looking Back…
Some two years ago, I found myself having a very common conversation. It was September of 2022, and investors were concerned with rising inflation and the aftermath of COVID, and they were captivated by the allure of higher treasury rates. Come Thanksgiving (2022); the common turkey-time conversation was about the 2-year treasury yielding 4.5%. Everyone stating, “Why take the risk of the stock market when you can take a guaranteed 4.5%.” Money piling out of the market and into short-term treasuries.
It’s almost never fair to compare stock returns and treasury returns UNLESS an investor was taking money out of the market and tactically replacing it with a treasury note – in those cases, the comparison isn’t just fair, I would encourage it. Now, some two years later, we can turn to the game film and measure the actual opportunity cost incurred. I’ll note that most investors will never take advantage of hindsight to measure opportunity cost, but I suppose it’s their loss (literally).
So, what’s the return of a 2-year treasury maturing this month? Well, depending on your purchase date, it was roughly a total return of 7% (3.5% per year) over that time period. Here’s the return of the S&P 500 over the same time period: 17.3%.
That’s only a 10% difference, though, right? Right, and that is a HUGE difference. Investors were taking millions of dollars out of the stock market and piling millions of dollars into the treasury market. I recall one investor sidelining $2mm with this thesis/strategy. That was a $200,000 mistake.
Striving for Average
This is why design and framework are such key attributes to a successful investment strategy. Let’s start with the framework. When working with clients, we discuss two different buckets of money – one bucket for emergencies, sleeping well at night, and to retain access (liquidity) and stable prices (low volatility) if a need arises. There is another bucket with the sole purpose of war against inflation – to retain buying power via growth. Here’s the framework: these two buckets co-exist but should never mingle or cross-pollinate. In the design process, an allocation is assigned to that safe-keeping bucket and another allocation to that compound-wealth bucket. In 2022, timid investors started pouring one bucket into the other and now are left with that unretrievable opportunity cost.
Here’s the worst part. In order to get “average returns,” you need to be in the market and stay in the market. The market rarely delivers its historical average of 8% – 10%, but rather, it has a high standard deviation – high highs and low lows. So, a sidelined investor in 2023 sat out of one of the best market years of the last decade. That investor needed that juicy 2023 return to achieve that long-term average they are seeking.
Fanning the Flame
In the world of football, the Seattle Seahawks fans are well known. They waive a flag with a big number 12 on it. For the unknowing spectator, one might think they are rooting for their favorite player (#12), but quite the contrary. In 1984, the Seahawks retired jersey #12 as a head nod to their amazing fans. Football teams can only have 11 men on the field for offense or defense, but the crowd in Seattle is so electrifying they’re referred to as a 12th man on the field.
You need your safety bucket AND your compounding bucket.
Fans can’t win games, but they can enhance the experience. Advisors can’t make you do anything, but hopefully, they can guide you to prudence. I don’t have any other way to say it, but that investment markets truly are out to get you. As Bernard Baruch once said, “The main purpose of the stock market is to make fools of as many men as possible.” I’ll conclude with this slightly modified common adage, “Fool me once [markets], shame on you; fool me twice [markets], shame on me.”
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
