by Mish
Image from Why sitting on the sidelines in life — and investing — can be a big mistake.
Sitting on the sidelines in life is indeed a mistake.
But ask those who chased real estate in 2007 or dotcom companies in 2000 about investment mistakes.
Better yet ask Japanese Nikkei investors still hoping to get back to even after three decades. Contrary to near-universal disbelief, that can happen here.
How long is your time horizon?
Larry writes:
Hi Mish,
Please do a story on how older people like my dad 68 can re-enter the stock market to balance out his portfolio at the next 40% bottom. He has had a war chest of $5 million to put in equities in 2009. He picked 6000 on the Dow as a starting point which proved greedy. At 6700 it got close but he thought it would be a dead cat bounce. He did not understand how QE would cause zero interest rates and allow companies to refi their debt and show more profits.
So far he has been willing to be patient and not chase yield. He is surprised how long the low-interest rate environment has lasted. He did not think he would have another opportunity but now he thinks he might. He also has money set aside to buy more real estate but the low caps and retail and office weakness have kept that in his pocket too. He missed the apartment rent increase play.
What would you have told people like him to do in 2009 and what would you tell them to do when the market gets whittled down slowly vs 1929, 2000, 2009? I Hate to see him do the wrong thing at his age.
Probably a lot of your readers are like him conservative to a fault.
Happiness = Wealth
For starters, it seems like your dad has $5 million. How bad can that be?
Maybe your dad could now be sitting on $25 million.
Had he thrown $100,000 at Bitcoin at the right time he might have a billion dollars. Ignoring Bitcoin, would he be any happier with $25 million than $5 million?
I know what I would have advised in 2009 because I know what I did. I bought when the S&P hit 666. My mistake was hedging after a double and getting out almost totally near $1500 except for some gold and miners that got clobbered. Ouch!
But the miners recovered nicely, and I am in some biotech plays that I like a lot. I am heavily in one private placement medical play that is doing exceptionally well but is still in a lockup period.
Like your dad, I have enough to live comfortably in retirement.
I have never been happier. I won’t even retire, I like what I am doing and I am having fun.
Happiness is wealth. What good does $25 million do if you are miserable?
— Mike “Mish” Shedlock (@MishGEA) September 1, 2017
Understanding QE
I failed to understand what QE would do. Many of us did.
Many others believe they are geniuses because they accurately predicted what would happen.
In reality, the result may have been random. Things will not play out the same way the next time.
Opportunities Abound
There are always opportunities. They were giving gold miners away in late 2015 and early 2016. Pull up a chart of Newmont (NEM). In late 2015 one could have purchased NEM at $15. It tripled but fell back a bit. How bad is that?
Some junior miners are up 1000% in the same timeframe. Gold sentiment was a total washout in early 2015. No one wanted miners.
My message is to buy value when no one wants it. That’s easier said than done.
I bought a basket of miners in 2013. Opps. I unloaded some winners and losers in that basket and I believe I am marginally ahead (have not even looked at that account for a while, I don’t care). But nearly everything I added after that is way ahead, and I have some huge winners.
Get In Safely?
The only way to get in safely is to get in on total washouts and hold until you have a profit. Even then you time horizon better match.
But what constitutes a total washout? Stocks can go to zero. Enron and Global Crossing come to mind. Amazon fell to $6. It’s now over $1000.
Buy Amazon here? No thanks. But I would have said that at $250 if not before.
Back to Dad
It’s not clear that your dad needs to be doing anything. What does he want? What does he need? How long does he expect to live?
It’s not possible to fully answer your initial question not knowing the above.
My only fear would be your dad start chasing things after this massive rally. Recessions do happen. So do profit warning declines. In my estimation, it would take a 50% decline in the markets just for stocks to get back to normal valuations.
It is far easier to make up for lost opportunities than realized losses! More opportunities will come, but no one flashes a light.
Staying on the sidelines with a bit of gold and miners seems like a reasonably prudent action at this point even though I personally am overweight miners.
Final Thoughts
Investing is much easier when you don’t care about the outcome. The greater the concern about losses, the less one should be in the market.
— Mike “Mish” Shedlock (@MishGEA) September 1, 2017
Some people really do not belong in this market at all. Perhaps your dad is one of them. What’s his timeline? What’s yours?
Mike “Mish” Shedlock.
Buenas ideas las que se presentan en este artículo!
Intrinsic happiness is the real happiness
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My advice?
Invest in other than the US market at this point. There are countries out there with much more to gain at this point.
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In July of 2010 your father could have gotten 1,000 bitcoins for $8. A million for $8,000. In 2017 he could have sold those 1 million bitcoin for a few dollars less than 20 BILLION. If that does not illustrate how insane our economics has become nothing ever will, BC is not even a tangible thing, it produces nothing at all, it really is nothing more than a computer game in which the only real profit accrues to hackers and theives, all other gains are gotten based upon the losses of millions of people who had to be fleeced by BC’s fraudulent nature. Really the ultimate pyramid scheme with zero accounting.
I was once a registered licensed rep with NASDQ and so do not give financial advice to individual with any specificity, but, I can talk about general financial principals, or at least what they used to be before all forms of economics and finance and accounting were utterly corrupted by the Fed and central banksters.
ALL investing is a risk/return calculation and there are NO investments without risk, period.
The man who has millions in cash waiting on the sidelines is actually taking a fairly large risk and sitting in cash IS an investment scheme, likely a losing one at that. He has two major risks, one is inflation, the other is opportunity costs eating his future investment potential.
US dollar paper money, fiat, legal tender, we have a lot of terms for it, but just to have it sitting there earning nothing, you might as well set it on fire.
Sure, this man has convinced himself that he is “preserving his capital” in a risky market, probably because he has been burned in the GFC since that is when he went to all cash and stayed there. Meaning his risk tolerance is basically zero, so low he will not even buy guaranteed government securities like TIPS, or private dividend paying equities like utilities, or hybrid bond/real estate dividend payers like REITS. But for more than a decade is some serious resistance to risk.
If this is the case I suggest you not push the guy much, he likely will not react well and it will affect your relationship. Unless he has already cut you out of his will and left it to something like PBS or cat shelters then he is planning to make sure there is something to leave to you, though it will not be as much as if it were wisely invested.
On the other hand, unless he is a Bilderberg or a member of the Bohemian Grove, or a governor sitting on the Fed board, then he has no way to know what is going to happen next in the markets, will currencies like the yuan destabilize? Will the EU collapse taking the Euro with it? Will Trump eek out yet another MIRACLE EC win and finish off the US and thus the dollar?
If I had $5 million right this moment the last thing I would be invested in would be equities and after that bonds, then cash. I would put about 1 million into productive but remote farmland with good water resources, another million into silver, with another million in gold.
The rest I would use to improve the property, make it secure as possible. No place is totally secure but you can make it so formidable only a real idiot would try to take it. Make it as comfortable as modern life can be post collapse in case that does happen. And the rest? Distribute to loved ones so that they can enjoy their lives while we still have a modern world of miracles we take for granted, but will be gone in the event of a collapse which the GFC was just a tiny morsel of foretaste. If they want to “invest it” fine, if they want to travel while we still can good, if they just want to blow it on coke and hookers well it is theirs to do with as they please. Because after the collapse none of those things will be possible, and forgetting to live a great life is one of the worst evils of large cash hoards.
Nice post, Herkie. I’ll have to say that the whole Bitcoin phenomena still has me perplexed. Back in 1999/2000 I rode the tech stock boom to some lofty gains, sensing that it was largely hype but taking advantage anyway. Then I got caught in the early part of the downdraft and gave some of it back before bailing. Which made me turn into a more cautious semi-bear. I have not had the same luck with play money in the market since, though on other fronts I’ve done well enough. I’ve learned that I’m mostly a logical and not emotional thinker, and us types are not usually the best at playing the market. So I mostly go in cautiously these days.
That whole 2000 tech boom episode made me really question how money is valued and why paper money and electronic bits backed by nothing like gold retains value the way it seems to. The only conclusion I could derive was that as long as the dollar is designated as our official currency, it’s essentially backed primarily by the work of all Americans, the military, the land and assets of the US, and people’s willingness to accept it as legal tender that is backed by these things. When the Fed and Treasury can create more money seemingly out of thin air, and negative consequences of ever increasing debt do not seem to accrue at any expected pace, I am still left somewhat scratching my head.
Bitcoin and cryptocurrency seems to have no backing at all other than some peoples’ confidence in it because it is “rare” and hard to create (and an enormous waste of electricity if you ask me). I also think that if it does gain significantly more institutional support, the governments of the world will move to either ban or usurp cryptocurrency for its own. Its current valuation is just stunning to me, and the people who talk about Bitcoin going to 1 million dollars….man oh man, why?
I’ve been around long enough to see these manias look invincible and then inevitably crash several times. It will likely happen again, but with the current stimulus and more probably coming, and young retail investors seeming to proliferate on social media with the fear of missing out, this market may run quite a bit more before the inevitable crack. Since I’m little more than an amateur speculator, however, I’m not willing to bet the farm on any particular outcome.
The most important thing about your post though IMO is to enjoy life as much as possible (though keeping an eye on protecting your assets), which to me isn’t about accumulating as much money as possible or worrying about how I’m doing compared to others. What I like to do best is explore the outdoors and new places, and in retirement, I’m doing that as much as possible throughout the western US and other scenic parts of the world, and will keep doing that until I’m not able to anymore. Hopefully, until about 95 years of age 🙂
Excellent post! Beyond informative as usual. Keep up the good work and don’t let COVID get you down!
-Eric
It’s funny to look back on this when Amazon’s stock was at $1000 and it seemed like a bad buy. Now, only three years later it is at a whopping $2600.
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It is impossible to overstate the cognitive errors induced by hindsight.
Yes, in general one should be bold when others are fearful and vice-versa. It is an entirely different thing to put that into action, because it dictates that when everyone else is abandoning ship, you should take its wheel. (1) Few people have the mental steel to do it. (2) You might be on the Titanic.
To posit that “QE had [ X ] effect” is pure hindsight. The Fed in the 1930’s tried to restart the credit creation cycle several times, and it had no effect.
If the value of $250 (or $500, or $1,250) TRILLION in debt accelerates its decline (AKA interest rates keep rising, or accelerate higher), will a massive bond-buying binge on the part of the central bank stop the stampede toward the exits? Are you sure?
A complete, utter collapse in a market requires two things: (1) A period of “investor optimism” broad and deep enough to generate embedded rationalizations (e.g., QE drives markets higher.) (2) Recent experience teaching people that markets always come roaring back.
These are the basis for eschewing capitulation, which is THE essential ingredient of a market bottom. Looking at things today, if stocks fell 50%, what would typical people do? THEY’D DOUBLE DOWN. If stocks fell another 50%, what would they do? THEY’D DOUBLE DOWN AGAIN.
After all, the foregoing 75% decline would only take prices back to where they were just 10 years ago. If investors saw the lows of 2009 again, what would they do? Mortgage the house and invest on full margin on the long side.
That’s not capitulation.
This isn’t a forecast, it’s a warning.
I like your blog post. Keep on writing this type of great stuff. I’ll make sure to follow up on your blog in the future.
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” how you picked S&P 666″? Easy: it’s the devil’s number!
Dad would like to know how you picked S&P 666 to reenter or start investing again in 2009 ( not far from his Dow 6000). Since it is hard to pick the bottom were you just lucky ?? Come to find out he has $10m cash siting on the side lines not 5m and 6m in real estate. He also has $1m in the Vanguard total Stock market fund and a quit a bit of silver. He buys used cars so you can see his mentality. He hates any one telling him what to do and does not trust any one. He thinks one is not rich until you have at least $25m. I guess that was/is his goal. He likes what the Sitka guy said about you a lot. He wants to know if you do investment advise advise out side of Sitka and if so how much you charge to do it?
Well said Mish. I’m younger than this dad, and with a much smaller war chest, mostly in cash. But, I sleep well at night without worrying about when the bottom falls out. If/when the market drops by half, I’ll probably start sneaking back in. Meanwhile, I buy some gold and silver now and then. Life is good. It’s even better if you’re sitting on $5 million that is not at risk.
Agreed. $5M in a 12-month CD yields over $100,000/yr now. Unless one has a taste for flying jet aircraft, that’s a comfortable retirement.
Sounds like the kid of this wealthy man is self-interestedly trying to grow his inheritance.
What happens if the market quadruples over the next 10 years while yields go negative?
…and inflation hits 10%?