Every bull market ends. When this one ends is anyone’s guess. But that won’t stop people from asking when or guessing either.
The fact that nobody knows when doesn’t stop the repeatedly asked question that comes up in some form of: should you own stocks?
It gets asked daily by business news hosts. They ask it during bear markets too. It’s a silly question.
Howard Marks offered his views on the bull market and that question specifically at the start of the week. Here’s what he said.
Back in ’07/’08, in the crisis, people got into the habit of asking me what inning are we in?… Now, they’re asking on the upcycle, what inning are we in? And my answer is we’re in the eighth inning.
But about a year ago I came to the realization that, unlike baseball, we don’t know how many innings there are…So if we’re in the eighth inning, is this game gonna go nine or eleven or fourteen.
Now, this is the third longest recovery in recent history. If it goes another year, it’ll be the longest. When you’re working on the eleventh year of a recovery, and there’s never been one more than ten, you can’t say you have the odds in your favor.
Then the should you own stocks question came up. “As an investor, are you in or are you out?”
And it’s asked in a ridiculously binary way as if there are only two options: all in or all out. It’s a great question for viewers driven towards action. But it’s absolutely useless for anyone looking for solid investment advice. The right answer is always more complex than that.
I’ve harped on this before. Asset allocation is like turning dials. You always own, at least, a small portion of stocks and bonds. Ben Graham suggested a basic allocation that always held 25% stocks and 25% bonds, and the other 50% was up to you. That way, if you’re wrong you don’t miss out entirely.
Luckily, Marks knows the answer is more complex and offers a great way to view risk (emphasis mine).
I don’t think anybody can ever be sure enough to either be all in or all out. I think you have to calibrate your position. You have to calibrate the risks you want to take relative to your normal risk posture, relative to where we stand in the environment.
What should one’s risk posture be today?… An investor, every day, faces two risks. The obvious one is the risk of losing money. A little less obvious one is the risk of missing opportunity. Which one — we should ask ourselves every day — should we worry about more today?
It’s a great reminder that investing is about managing risk. Returns are what results from doing that.
So are you worried about the risk of losing money or missing opportunities today? Your answer will influence your asset allocation decisions.
The hard part is that there is no right answer. Meaning, everyone’s comfort level with risk — as it relates to what we’re trying to accomplish — is different.
There are, however, a few wrong answers. One wrong answer would succumb to the “all in”, “all out” line of thinking. Another would be short-term based when long-term thinking is needed.
The wrong answers are costly in the long run by being too greedy or fearful, instantly gratifying, devoid of facts, or reliant on timing. Those are the answers you want to avoid.
At the very least, you should be a little worried about both. Now, this might seem a little obvious, but your portfolio’s allocation should, at least, be a little prepared for both too.
Source: Howard Marks on CNBC
Last Call
- Spies, Crime, and Lightning Strikes: The Value of Probabilistic Thinking – Farnam Street
- There’s a Right Way and a Wrong Way to Fail – B. Ritholtz
- Why Can’t Fund Managers Admit Mistakes? – Behavioral Investment
- Biases Don’t Make Investors Foolish – Morningstar
- The Moat Map – Stratechery
- Sports Gambling is Legal Now, Thanks to the Media – The Ringer
- Quarterly Letter: Is Investing Starting to Get Difficult Again (pdf) – GMO
- Jay Leno Is Worth $350 Million, Owns 181 Cars But Still Lives Like Someone on Their Last Dime – Money
- When Milky Got His Money – Esquire
- Nikola Tesla Could Have Been the Richest Man Ever – Intelligent Fanatics
