March 2021
IN THIS ISSUE
Solid historical and fundamental analysis from Ray Dalio
$30 billion of firepower, now that can move markets
17,715%
Did you see this eye-popping statistic out of Bank of America?
Looking at data going back to 1930, [Bank of America] found that if an investor missed the S&P 500′s 10 best days each decade, the total return would stand at 28%. If, on the other hand, the investor held steady through the ups and downs, the return would have been 17,715%.
The report also noted that the best days - those 10 days each decade for which staying invested is so critical - tend to not only be clustered together but also tend to occur soon after the worst days when people typically sell.
So here are those 10 best and worst days by Change (%) in the past 10 years, sorted by Date:
Source: Interactive Brokers, Likely Capital Management
Sure looks clustered to me. And look at that COVID-19 window!
The market dynamics are not complicated here. When everyone is selling, eventually the sellers dry up and there ceases to be a seller for every buyer. At that point, even a relatively small amount of demand from buyers can make prices rebound significantly before finding a price level at which sellers are willing to resume selling once more. Of course algorithmic trading contributes to this price action too.
Managing the authentic risks in portfolios such that investors do not need to sell during the worst downturns is how to play the long game successfully.
Lance Roberts previously gave this thoughtful critique on this not-new statistic. As Likelyhoods readers know well, market timing does not work. To say investors can juice returns by avoiding the 10 worst days, or by being overweight on the best 10 days, misunderstands the critical insight of this statistic. Of course nobody can identify the 10 worst or the 10 best days, you know what they say about hindsight! But managing the authentic risks in portfolios such that investors do not need to sell during the worst downturns is how to play the long game successfully.
Luck or Skill?
Fund Manager X bought Rocket Companies (RKT) in 2019 - you know, before “wallstreetbets” went viral in early 2020. The “wallstreetbets hedge fund” did its thing, RKT launched, and Fund Manager X is now up big.
Should investors pile into X? Likely not, but of course they do.
Here’s Annie Duke on how we tend to explain good versus bad outcomes:
“When we have good outcomes, we really don't look for the luck. And when we have bad outcomes, we eagerly seek it out.”
It’s a heads-I-win-tails-you-lose case of preserving our identities as skilled decision-makers. When explaining our own negative outcomes, it just feels better to cite bad luck rather than bad skill.
I wrote this in December:
Annie Duke’s latest book Thinking in Bets details what she calls Resulting, also known as Outcome Bias, which is judging the quality of a decision by the outcome rather than the decision-making process. Especially with highly uncertain contexts like investing, luck is rarely credited in explaining profitable outcomes.
Sorry, but if you argue that Fund Manager X had value-adding foresight that a “retail hedge fund” would turn RKT into a rocket meme stock and send its share price to the moon, well, I don’t believe you. In all Likelyhood this Fund Manager X got lucky, and it would be a mistake to attribute X’s meme-induced performance primarily to skill.
This issue is not academic - there are real consequences to Resulting. Investing in a manager based on their results without a rigorous analysis of their decision-making processes is bound to underperform when inevitably their “luck runs out” and their performance regresses to the mean of that lower skill level. The universal disclaimer “Past performance may not be indicative of future results” is pretty much warning against luck-based past performance that by definition is not replicable into the future.
An Entertaining Disclaimer
Please find a spare minute to read the highly amusing wallstreetbets disclaimer. Some highlights:
“In fact, it is understood by you, the user who may or may not be human, that nothing on this subreddit actually means anything at all.”
“The subreddit should be of little to no educational value, but if you feel you have learned something that is 100% on you and we will not be held liable for whatever “knowledge” you have gleaned.”
“Before making any decisions regarding how you are going to burn your money you should probably go read Investopedia or something.”
“Past performance is no guarantee of future results, but in this case, it probably is as you likely are going to be just as broke in the future as you are now.”
I would love to see a lawsuit in which attorneys argue over the proper interpretations of this language.
ONE MORE THING…
Solid historical and fundamental analysis from Ray Dalio: Why in the World Would You Own Bonds When…
$30 billion of firepower, now that can move markets: Young retail investors plan to spend almost half of their stimulus checks on stocks, Deutsche survey claims
The information and opinions contained in this newsletter are for background and informational/educational purposes only. The information herein is not personalized investment advice nor an investment recommendation on the part of Likely Capital Management, LLC (“Likely Capital”). No portion of the commentary included herein is to be construed as an offer or a solicitation to effect any transaction in securities. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information or opinions contained herein, and no liability is accepted as to the accuracy or completeness of any such information or opinions.
Past performance is not indicative of future performance. There can be no assurance that any investment described herein will replicate its past performance or achieve its current objectives.
Copyright in this newsletter is owned by Likely Capital unless otherwise indicated. The unauthorized use of any material herein may violate numerous statutes, regulations and laws, including, but not limited to, copyright or trademark laws.
Any third-party web sites (“Linked Sites”) or services linked to by this newsletter are not under our control, and therefore we take no responsibility for the Linked Site’s content. The inclusion of any Linked Site does not imply endorsement by Likely Capital of the Linked Site. Use of any such Linked Site is at the user’s own risk.