Learning to Run Downhill

DIS and DAT - Learning to Run Downhill - February 2021

Our periodic communication that reminds you to ask, “Should I react to those headlines?”

“The art of running downhill…. Don’t trip yourself while running downhill.  That mountain you wanna climb? It’s just around the corner.  DON’T INVENT DRAMA.  It will come on its own.”   Matthew McConaughey

                I am writing this on my birthday, and like everyone else, this one is vastly different then birthdays past.  During the lockdown of 2020 and now 2021 I have spent more time reading.  One of the books I picked up was Matthew McConaughey’s Greenlights.  In one of the chapters, “Learning to Run Downhill” he talks about how, early in his acting career he had a habit of tripping after he achieved some success, and how he learned to start dealing with success.

                It caught my attention, and not just because my age now means all mentions of “downhill” tend to catch my eye.  As the market has continued higher, despite some very trying events, McConaughey’s words rang true for the investor as well.  I previously wrote about the fear of success, and this is related to that topic.  By learning to behave as an investor, - as opposed to a gambler or speculator, you can put these market moves into perspective and learn to run downhill, - instead of turning your success into a face plant.

                One of those ways of learning to re act as an investor is to understand Item 4 in our “Guidelines for Developing an Investment Mindset,” which I have highlighted below.

                Guidelines for Developing an Investment Mindset

There is no guarantee on account performance.

Investment managers have discretion on investment decisions, unless reasonable restrictions have been placed. 

We will not invest based on popularity but rather based on an analysis of the business and investment opportunity.

We have no skill in predicting market moves, economic cycles, or political events, etc. Thankfully, we do not find that necessary to achieve decent investment returns.

We expect some investments will fail to achieve the desired result, thus the need for diversification and a broader view over multiple positions and time frames.

Investments performance should be judged on a time frame equivalent to a full market cycle.  That cycle is typically measured in years; five-year cycles are a general thought. A full market cycle would be boom-bust-boom or bust-boom-bust.

We are not seeking outperformance of all investments at all times.  If a popular momentum-driven pricing environment in any area of investments occurs, underperformance of that area is expected.

Today we are going to delve into the true meaning of that fourth tenet.  I did not arrive in this industry with that humility; - the market beat it into me, and it’s a mindset I actively work to cultivate even today.  There are still times when I hear; - or read a prognosticators report, and I am overcome with a feeling that I am missing out.  It doesn’t last long nowadays, and neither do I tend to keep listening or reading when I come across it.  Additionally, I have not watched CNBC, and I have weaned myself off the political talk.  It is far too easy to be swayed by those topics and is a necessity to stay true to #4. 

“SKILL”

Let’s home in on the meaning behind each term used in our Item #4. It first refers to skill.  I must admit, I occasionally get the answer right on one of those two- answer questions: true or false, bull or bear, red or blue, etc. I learned that getting the right answer does not to equate to investment skill. Instead, it related to luck or probability. And the thing is you are just as likely to end up with the wrong answer in those scenarios as the right, so such guessing should be minimized.

“Market Moves”

Another phrase in the bullet point is “market moves.” Market moves tend to be broader in scope than individual events and are difficult if not impossible to predict with regularity or accuracy.   In my experience, you can get the binary event answer right, but totally miss the market move. 

There are two main reasons why you most likely will not predict the market event correctly and make a lot of money from doing so.  First, you are smarter than to bet any sizeable amount of money on something like that.  (And if you aren’t, an old saying comes to mind, “Gamblers die broke.”

 Second, your ego gets tied up in it.  Let’s say you do get it “right.” You then end up in a cycle of maintaining that “I got it right” feeling, which is impossible in the long-term- because the market never ends.  When is your bet over?  If you unwind your bet too soon, then you may have only been in on the first phase of the move, and you lose even more as the event continues to unwind after you’ve pulled out. (In other words, you “cover” too early.)  The other option is - you guessed it - you can also “cover” too late and the trend totally reverses itself.  In a continuously moving market, you must repeatedly cover and uncover precisely right for multiple hundreds or even thousands of times. 

Oh, and did I mention there are multiple markets?  What about bonds, foreign, commodities, etc.?  And the markets are multi-factored.  You may get, say, the election outcome correct, but then out of nowhere a pandemic could hit. (Sound familiar?) The next major event will likely not be familiar. 

What does all that mean? Don’t let your ego be the thing that trips you up.  Don’t let one “right” guess lead you down an inadvisable path with your money.

(Yes, I hold a grudge. The market is a maniac I tell you!)

“Necessary” and “Decent”

The next word I’d like to talk about is “necessary.”  We do not believe that your financial survival is dependent upon you guessing market moves; a focus on the underlying business in which you invest is more important to your overall success.

Finally, the last word I’d like to review is “decent.”  Decent investment returns are very difficult to achieve, even if Warren Buffett calls it “simple.”  The simple part is also the key:  lower expectations.  If your sights are not set on obtaining unrealistically high returns, then there is no pressure to predict market moves.  Remember, avoiding a full destruction of your portfolio should take precedence.

Therefore, my advice is to not be surprised by a market pullback, a market advance, or a market stagnation.  They all happen, and they happen in unpredictable fashion.  If you don’t set yourself up in a position where you must predict them, in order to succeed, you will avoid that pressure and may end up, in the long run, with better performance. 

And just like that, you’ve learned to run downhill without tripping over yourself.

Thanks for your attention, and

                I hope this helps.  Be safe.

Talk with you soon,

James

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