A Constraint You Can Use to Improve Your Investment Decisions

Investing one’s savings is about keeping your decisions consistent and not letting your emotions stray you off course. I read good comments by two bright individuals on this subject last week.

After the financial crisis in 2008-09, investor Joel Greenblatt made the point that the error many people made was owning too much stock so that when the value of their holdings declined 50%, the shock to them emotionally led to a panic decision to sell at the wrong time.

A simple test: the amount of stocks you own should be an amount that if it declined 50% in value in the interim, you would not be too upset.

Professional gambler and investor Haralabos Voulgaris had similar advice for a person asking how to approach investing in Bitcoin: “Don’t buy more than you can afford to lose, set it aside, don’t sweat the day to day nonsense and hold.” The same advice can be used for stocks.

Sources: The Brooklyn InvestorHaralabos Voulgaris

Timing The Market Doesn’t Add As Much As You Think

Some of the best investors of recent decades (Warren Buffett, Seth Klarman, Howard Marks, etc.) are holding greater amounts of cash in their portfolios today than they typically do.

It is an easy observation to say there are fewer investment bargains available in the marketplace than one historically would find. The question is how much does “timing the market” (holding more or less cash in your portfolio depending on the market environment) add to your total returns in the long run?

Nir Kaissar attempted to answer the question and his findings show it’s not much, even if you are good at timing (which most investors aren’t).

With the benefit of hindsight, Kaissar created a market timing strategy that would invest in either stocks or Treasury bonds depending on how high stock valuations were. The value added was just 0.3% per year.

Another case study was looking at the cash Warren Buffett kept on the balance sheet of Berkshire Hathaway over the last thirty years. On average, 9% of Berkshire’s assets were cash since 1987, but this fluctuated from as low as 1% to as high as 23%. Buffett’s discretionary cash positioning was better than keeping cash at the average 9% of assets for the full thirty years, but it only added 0.1% to the firm’s total returns.

The simple conclusion Kaissar comes to is that for the legendary investors, it’s not the market timing that makes them legends but the outsized returns of the companies they do choose to invest in.

Source: Nir Kaissar at Bloomberg

PS – Buffett touched on this subject himself in his 1994 annual letter to shareholders. He recognizes their best purchases historically come when macro event worries are at a peak but does not pay explicit attention to them.

We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.


If You Own Bitcoin, Be Okay Losing 85-95% of Your Investment

I do not have strong conviction, positive or negative, about Bitcoin. I have seen some smart people call it a fraud while other smart individuals I follow suggest holding 1-5% of your savings in the cryptocurrency for the next 5-10 years.

However, the piece I found interesting from this column on Bitcoin by Charlie Bilello is the table below. In Bitcoin’s decade-long history, there have already been three declines from high to low of 85% or more. That has not slowed the exponential ascent of the currency, but if you are going to hold some Bitcoin (or another cryptocurrency), recognize how volatile its price movements can be so you do not emotionally sell out at the wrong time.

Bitcoin has fallen 85-95% from peak three times since 2010

Source: Charlie Bilello at Pension Partners