What to do When the Stock Market is Crazy
A few weeks back I posted some doom and gloom about the current state of the stock market. I stand by that post. Stock market valuations are above almost anything seen in history coupled with dismal outlooks for future growth. The best description I can give of the current state of public markets today is simply: crazy and disconnected from reality. What happens from here remains unknown and unknowable – but the bottom line for me is clear. Investors in the stock market at current valuations are taking on huge amounts of risk. A risk that they may not even realize is there given the relative placidity and regularity of returns over the last decade. It’s been easy money for a very long time, this is unlikely to continue.
Many investors today have only hazy (or no) memories of the turmoil of the markets in ten years ago, let alone 20 or 30 years ago. Many have been led into investing by a sirens song of assured profits and stories of wealth earned easily – just put your money in an ETF and wait! The stock market always goes up over long periods of time! We don’t realize just how the stock market can be a harsh mistress, turning murderous just when things seem most pleasant. In the last year, discount brokerage houses like Schwab have seen some of the largest new account (paywall) creation numbers since the dotcom bubble. Many new investors are pouring into the stock market, led in by a host of financial news sites, blogs, and talking heads all preaching the wonders of the stock market.
I’m guilty of it myself. The stock market is a fantastic creator of wealth over time. It should be an important part of any portfolio, but any investor needs to appreciate and realize the risks they take on. My worry is that many of the investors flooding into the market right now do not appreciate and realize these risks. Over the last several decades we have seen the stock market shed 50%+ of its value over the course of a year – this is not a stable, safe, investment. It is a wild tempest that requires respect, care, and an acknowledgment that it can and will kill you if given the chance.
So what in the heck are the Grizzlies actually doing with their money? Getting out of our jobs was perhaps one of the best things that ever happened to us, both personally, as well as financially. It allowed us both the time to take a good hard look at what is going on in public markets today and to become terrified of what we saw.
We have up until now been good faithful followers of the ‘just put it in index funds’ methodology. I stand by that approach – the bottom line is that most financial services firms are out to make a buck and will charge exorbitant fees to do far worse than passive index-based investment strategies. By far, you are almost always better off investing in an index fund than in some random mutual fund offered by an investment company advertising on TV or trying to hock their products in some other way. Minimizing fees is and always will be critical! And most investment advisors and mutual fund managers are not worth the money they charge.
The Grizzly’s are simply adapting our own approach to what we see as an inherently very risky environment
Buy low, sell high. The most important step in that equation is actually preserving the ability to buy low. When markets go crazy (and they always do eventually) the folks that make out the best over time are those that have the capital and the appetite to go in at the most chaotic and terrifying moment.
In the fall of 2008, I was a captain deployed to a small FOB in southern Iraq. I spent most of my days overseeing Iraqi contractors attempting to rebuild that shattered country, but I also had the great fortune of being able to see my own country start to descend into its own brand of chaos. On September 15, 2008 Lehman brothers declared bankruptcy marking the beginning of one of the most chaotic points in American Financial History.
What was Grizzly Dad doing at that point? In addition to enjoying the sites of Babil Province, I was dumping every spare penny I had into my Vanguard Brokerage Account. It wasn’t much, but it was all the combat pay I had saved over the previous months. Overall, between July and the end of September, I dropped $23k into short-term bonds and my money market account, getting ready. A couple weeks after the Lehman bankruptcy, I started buying the stock market. Some of those initial purchases lost 50% in the first month. Later ones did much better. Overall, those purchases I made from a converted shipping container in Iraq over a spotty internet connection were some of the best buys I’ve ever made. It wasn’t much, but being able to put money into the market when things are most crazy and everyone else is panicking is more valuable than gold.
In order to make those purchases, you actually have to have capital available that hasn’t itself been wiped out in the chaos. The Grizzlies intend to have that capital available when everyone else is shitting themselves. The first step we’ve taken is to simply shift into a dramatically less risky asset allocation. Overall, we have moved our portfolios to a mix of about 80% bonds, with much of that in government inflation-protected securities. The remaining 20% in stocks will likely stay for a few more months for two primary reasons – taxes on short-term capital gains and remaining diversification. It will likely come out as well once we hit 2018 and a new tax year. To give you a better picture of what our projected portfolio return looks like now, here is a quick chart from our personal capital account. This is simply how our present portfolio would have performed over the last 30 years:
Do we miss out on some upside? I suppose you could call it that, but I’ll take also missing out on those wild swings down on the other side. We are closer to one of those than many think.
All of this doom and gloom doesn’t mean the Grizzlies have completely given up on risky investments. We’ve just given up on risky public investments for the time being. That does not mean that there are not profitable investments available.
Both Grizzly Mom and I are turning a significant portion of our time and brainpower to finding profitable locations where we can deploy portions of our capital. Where are these magical places to put your money? Well, we’ll write about a few of them in more detail as we actually find them. But here are the broad areas where we are looking:
- Relatively low priced real-estate in our new home – Kansas City – and other areas around the mid-west. Even prices here have started to get a little crazy, but there are still many pockets where good returns can be had with limited investment.
- Private Companies. There are several very good mid-west angel investment pools that have great track records based right here in our fair little city. These aren’t your Silicon Vally VCs dropping >$100m on a juice machine. Their portfolios are largely interesting B2B, healthcare, or industrial companies with solid business plans, good track records, gray-haired management teams, and good financial results already in the bag. They just don’t have rich SF tech bros flinging bags of cash at them.
- Our own ventures. Grizzly Mom and I now have some freedom and some time on our hands. We might just join or build something cool.