On Baseball and Market Timing

It looks easy when you see ballplayers at the stadium or on television catching a fly ball. It seems this is what we did when we were kids. It’s really, “We could be down there. There isn’t that much separating me from Bo Jackson or George Brett. I could be there. I could do that.” You have the illusion. Baseball fosters illusions. Baseball fosters hopes. Baseball inflates us. Baseball lies to us seductively and we know we’re being seduced and we don’t complain.

-John Thorn, Baseball, 1994

With baseball season delayed due to the pandemic, I recently spent a relaxing Sunday evening watching an episode of Ken Burn’s legendary documentary “Baseball.” The above quote struck me for a two reasons.

  1. Baseball DOES look easy, yet I doubt many non-professionals could make contact with a slow 90 MPH fastball even if they had 50 chances. Even fewer people could hit the ball fair (instead of fouling it off) and probably none could do it consistently. I haven’t even mentioned pitches with movement yet, like a curveball or a slider. The same holds true for sports like tennis or golf. What amateur can return a top-ranked player’s serve or who can sink long puts with any consistency? Some things are a lot harder than they look.
  2. Timing the market is a lot harder than it looks. I won’t go into why this is, except to say that it is questionable whether anyone can do it and the professional consensus is that it should not be attempted. Yet, like baseball, many observers believe that they can do it. Below are what some of the most successful investors have to say:

First of all … an investor must understand that they probably will not be able to play the game well. They probably will not be able to decide how to move in and out of things. In order to be successful in the markets, it is more difficult than getting a gold medal in the Olympics. You wouldn’t think about competing in the Olympics, but everybody thinks they can compete in the markets. But there’s more money competing. It’s like a zero-sum game and there’s more money doing it, and the worst thing you could do is think you can time all of these movements. I guarantee you, the game is a tough game. We put hundreds of millions of dollars into the game every year. And it’s tough. So what the individual investor needs to do is know how to diversify well. So the word that I would — Know how to diversify well and in a balanced way. ”

-Ray Dalio, TED Connects, 2020

I never have the faintest idea what the stock market is going to do in the next six months, or the next year, or the next two.”

-Warren Buffet, Fortune, 2001

…if I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.”

-Benjamin Graham, interview, 1976

Market timing, defined as a short-term bet against long-term policy targets, requires being right in the short run about factors that are impossible to predict in the short run.”

-David Swensen, Pioneering Portfolio Management, 2000

Top Investors on Market Direction and What To Do [COVID-19 Edition]

There is an endless debate about the future direction of markets, but the discussion seems more important now and people tend to grasp at any available information when uncertainty is perceived to be high. As always, both the optimists and pessimists have good arguments supported by endless amounts of data, solid logic, and historical analogs. Who should investors listen to and what should investors do?

Fortunately, some of the world’s best investors have chimed in on the topic over the past few weeks.

I don’t have the faintest idea whether the stock market is going to go lower than the old lows or whether it’s not.”

-Charlie Munger, WSJ, 4/17/2020

The future for all these things is clearly unknowable. We have no reason to think we know how they’ll operate in the period ahead, how they’ll interact with each other, and what the consequences will be for everything else.  In short, it’s my view that if you’re experiencing something that has never been seen before, you simply can’t say you know how it’ll turn out.

-Howard Marks, Memo: Knowledge of the Future, 4/14/2020

I don’t think I can make money by predicting what’s going to go on next week or next month,” he said. “I do think I can make money by predicting what will go on in the next 10 years.”

-Warren Buffett, CNBC, 2/24/2020

First of all … an investor must understand that they probably will not be able to play the game well. They probably will not be able to decide how to move in and out of things. In order to be successful in the markets, it is more difficult than getting a gold medal in the Olympics. You wouldn’t think about competing in the Olympics, but everybody thinks they can compete in the markets.”

-Ray Dalio, TED Connects, 4/8/2020

As usual, the consensus among the top investors today is:

  • We don’t know where the market is headed.
  • Deciding whether to be in or out of the market right now is unlikely to be profitable.

Turbulent times create some of the best opportunities, so investment decisions need to be made and executed well. However, predicting the direction of markets should not be a priority and you’re doing it wrong if it is.

S&P 500 vs Russell 1000

When comparing the S&P 500 and the Russell 1000, I found a story of two distinct eras. From 1994 until today, the returns are practically identical with only a .01% annualized difference!

Source: Bloomberg

However, the S&P 500 beat the Russell 1000 by a wide margin from the common datas’ inception of 1978 to 1994.

Source: Bloomberg

Selecting a benchmark includes many factors, but I found the above interesting.

The Mexican Fisherman

The famous “Mexican Fisherman” story is at least fifty years old, but it is a timeless tale that is both revealing and enlightening. Below is one version of the story:

An American investment banker was taking a much-needed vacation in a small coastal Mexican village when a small boat with just one fisherman docked. The boat had several large, fresh fish in it.

The investment banker was impressed by the quality of the fish and asked the Mexican how long it took to catch them. The Mexican replied, “Only a little while.” The banker then asked why he didn’t stay out longer and catch more fish?

The Mexican fisherman replied he had enough to support his family’s immediate needs.

The American then asked “But what do you do with the rest of your time?”

The Mexican fisherman replied, “I sleep late, fish a little, play with my children, take siesta with my wife, stroll into the village each evening where I sip wine and play guitar with my amigos: I have a full and busy life, señor.”

The investment banker scoffed, “I am an Ivy League MBA, and I could help you. You could spend more time fishing and with the proceeds buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats until eventually you would have a whole fleet of fishing boats. Instead of selling your catch to the middleman you could sell directly to the processor, eventually opening your own cannery. You could control the product, processing and distribution.”

Then he added, “Of course, you would need to leave this small coastal fishing village and move to Mexico City where you would run your growing enterprise.”

The Mexican fisherman asked, “But señor, how long will this all take?”

To which the American replied, “15–20 years.”

“But what then?” asked the Mexican.

The American laughed and said, “That’s the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich. You could make millions.”

“Millions, señor? Then what?”

To which the investment banker replied, “Then you would retire. You could move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

(This story was originally written by Heinrich Böll, although Tim Ferriss published the above adapted version which can be found across the internet.)

Parenting 101

“Do you have any financial advice for new parents?”

A handful of friends have asked this question in the past week. The question often relates to childcare expenses or college savings plans, but I usually advise new parents to prioritize the below items before anything else:

  • Buy enough term life insurance to provide for your family if you and/or your spouse die prematurely. There’s no “right” amount, so ask yourself what you would want covered if you passed. Your salary of x years? Your spouse’s salary so he/she wouldn’t have to work for y years? Childcare expenses for z years? Payoff a mortgage? College tuition? Other expenses? Add those numbers up and go get some quotes.
  • Establish an estate plan, including a revocable living trust and will. The will should appoint a guardian for your children if you pass away while they’re still minors, although the courts do have the final say. The will also directs what to do with assets that were excluded from the trust (or forgotten to be put in the trust, which I see very often!). The trust should help avoid probate for assets placed within it and provide for supervision of the assets for the benefit of the children.

Buying insurance and establishing an estate plan are simple steps, but each does require some time and money. Fortunately, each item can be a one-time decision, which is a relief for many new parents who are completely overwhelmed with the chaos of parenthood!

The above is educational and is not legal or financial advice. Every situation is different and I’m not an insurance agent or an attorney. 

2s10s

One of the most-watched economic indicators is the 2s10s spread, which is simply the difference between the 10-year US Treasury yield and the 2-year US Treasury yield. Below is a chart of the 2s10s through time.

We can see how the 2s10s spread is calculated below, by simply subtracting the 2-year yield (red line) from the 10-year yield (blue line).

The 2s10s spread is often referenced because it provides a quick and simple indication of the slope of the yield curve. Historically, steep yield curves (indicated by a high 2s10s reading) are often followed by strong economic and financial market performance, while flat yield curves (indicated by low 2s10s readings) are followed by weaker performance.

Sometimes the yield curve flattens so much that it “inverts” and shorter-term rates are higher than longer-term rates (and the 2s10s reading goes negative). An “inverted yield curve” is typically seen as a warning sign as inverted yield curves are often followed by recessions (shown as vertical gray bars in both charts).

It is worth pointing out that the 2-year yield (red line) moves quite a bit more than the 10-year yield (blue line). In other words, the slope of the yield curve is often driven by the movements in shorter-term rates, which happen to be more closely linked with conventional monetary policy rates (such as the Fed Funds rate). Thus, rate hikes often flatten curve while rate cuts often steepen the curve, which makes sense when we think about the goals of monetary policy and economic performance following steep/flat yield curves.

The 2s10s is just one of many similar measures and curious minds can just as easily look up the 2s30s, 5s10s, 5s30s, and so on. Yet the 2s10s is one that many people watch and I believe it is worth watching as well.

Note: the above graphs are embedded directly from the Federal Reserve, so they should always show “live” data. However, you may have to hold your mobile device horizontally for them to render correctly.

MSCI World vs MSCI ACWI

Source: Bloomberg

When comparing the MSCI World Index vs the MSCI All-Country World Index (ACWI) the other day, I was surprised by how closely they’ve tracked each other over the past 30+ years. Since their inception in 1988, the annualized difference is just .05%!

The MSCI World Index only includes stocks of developed markets (think the US, Western Europe, Japan, Canada, Australia, etc), while MSCI ACWI includes stocks in both developed and emerging markets (think China, India, Brazil, etc). Since emerging markets have bounced around between 10-15% of global market cap in the past decade (and were much smaller prior to that), the risk and returns of the MSCI World and MSCI ACWI indices have been nearly identical.

What does this mean for investors? Since the risks and returns of the indices are nearly identical, selecting an investment vehicle and cost structure may matter more than selecting the index. A fund investor might select MSCI ACWI due to the greater geographic diversification (especially with a large index fund that invests in local exchanges), while an SMA investor might opt for MSCI World due to cost considerations. Of course, the next 30 years could be completely different than the past 30 years!

National Incomes vs Global Incomes

Some of my favorite data visualizations are the charts produced by Branko Milanovic, which compare national income distributions to global income distributions. So I was thrilled to discover this website (created by Boris Yakubchik) which transforms Milanovic’s data into an interactive format where users can select which countries they want to graph. Below is a sample that I created using some of my favorite countries.

It can take a minute to understand what is going on, so here’s a brief primer and some examples. The vertical y-axis displays PPP-adjusted income and global income percentile, while the horizontal x-axis displays national income percentile. Let’s look at some examples from my chart:

  • An American earning $5,000/year is in the 8th percentile of American earners, but in the 70% percentile globally.
  • An Indonesian earning $3,000/year earns more than 90% of Indonesians, but only more than 60% of people globally.
  • A Dane earning $20,000/year is a very average Dane (~50% percentile), although they are close to the top 5% of earners globally.

It is easy to see that even poorer Americans and Danes are generally wealthier than the richer Indians, Indonesians, and Nepalis. This is just one observation made about a handful of countries, but there are many more ideas to takeaway from this data. Check out the website and create your own!

Giving More, Tomorrow

For one reason or another, people often share with me that they want to start donating money or increase the amount that they are donating. This is always great news, but often accompanied by real and/or perceived challenges. A few common ones that I hear include:

  • I want to start donating, but I don’t feel like I can right now.
  • I’m donating x% of my income. I feel compelled to give >x% of my income, but I don’t think I can do that right now.
  • I want to give $x, but my spouse is not on board with that.

In an ideal world, we could all just start donating our desired amount or increase to our desired amount at any time. Sometimes, we are unable to make these changes immediately or are looking for a more gradual approach. Several years ago, Shlomo Benartzi gave a TED Talk titled “Saving for Tomorrow, Tomorrow,” which relates to saving, but it could just as easily apply to giving.

Benartzi’s basic recommendation is to commit to saving a percentage of future increases in income (like raises and bonuses). Saving a portion of an increase requires no sacrifice today and takes the edge off of future sacrifices because net income still increases (because the new saving is just a portion on the increased amount). As an example, let’s say that I make $50,000 and want to save $5,000. It may be difficult to save 10% of my income immediately, but I could commit to saving 50% of my next raise. If I get a $1,000 raise, then I’ll save $500. Even though I’ve stuffed $500 into savings, I’m still netting an additional $500 of income. 

As mentioned, we could easily apply the same principles to giving. Below are some examples:

  • Someone who’s currently donating 10% of their income could try to get up to 12% by donating 20% of their future increases in income until their overall giving hits 12%.
  • Someone who wants to start donating could commit to donating 100% of any bonus.
  • There are all sorts of derivations and room for creativity. Suppose someone wanted to donate 6% of their income this year. They could donate 1% of income in Month 1, 2% of income in Month 2, and so on until Month 12 when they donate 12%. This is both gradual and would get them to their 6% annual giving target in Year 1 (a great feat). AND, the person would feel some relief when they drop their 12% donation rate back down to 6% in Month 13 (assuming they want to donate 6% each month in Year 2).

Sometimes getting started is the hardest part. Hopefully, the above is helpful in thinking about how to start giving or how to give more generously.

The Mexican Fisherman

The famous “Mexican Fisherman” story is at least fifty years old, but it is a timeless tale that is both revealing and enlightening. Below is one version of the story:

An American investment banker was taking a much-needed vacation in a small coastal Mexican village when a small boat with just one fisherman docked. The boat had several large, fresh fish in it.

The investment banker was impressed by the quality of the fish and asked the Mexican how long it took to catch them. The Mexican replied, “Only a little while.” The banker then asked why he didn’t stay out longer and catch more fish?

The Mexican fisherman replied he had enough to support his family’s immediate needs.

The American then asked “But what do you do with the rest of your time?”

The Mexican fisherman replied, “I sleep late, fish a little, play with my children, take siesta with my wife, stroll into the village each evening where I sip wine and play guitar with my amigos: I have a full and busy life, señor.”

The investment banker scoffed, “I am an Ivy League MBA, and I could help you. You could spend more time fishing and with the proceeds buy a bigger boat, and with the proceeds from the bigger boat you could buy several boats until eventually you would have a whole fleet of fishing boats. Instead of selling your catch to the middleman you could sell directly to the processor, eventually opening your own cannery. You could control the product, processing and distribution.”

Then he added, “Of course, you would need to leave this small coastal fishing village and move to Mexico City where you would run your growing enterprise.”

The Mexican fisherman asked, “But señor, how long will this all take?”

To which the American replied, “15–20 years.”

“But what then?” asked the Mexican.

The American laughed and said, “That’s the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich. You could make millions.”

“Millions, señor? Then what?”

To which the investment banker replied, “Then you would retire. You could move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

(This story was originally written by Heinrich Böll, although Tim Ferriss published the above adapted version which can be found across the internet.)