Psychological challenge of sticking with a volatile portfolio

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Mister Imperceptible
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Mister Imperceptible »

@c_L

Lower leverage rates? There was already record corporate debts before this, and the alphabet soup lending facilities opened by the Fed has increased this leverage. Have I misunderstood your question? Leverage is inherently neutral but too much hinders growth and has increasingly diminishing returns.

Lower corporate taxes rates increasing profits- yes that is exactly what happened with the December 2017 Tax Cut, and it spurned a wave a corporate buybacks.

Decreased non-US production? My understanding is that US labor is more expensive and domestic production will decrease profits.

Right now we have:
-Record low corporate tax rates
-Record debt levels
-Global supply chain dependent on cheap foreign labor.

So the above is why we have the stock-economy disconnect. That, and now faith in the Fed.

I think I mentioned in the Investment Log that I bought more put options after the corporate bond purchase announcement. And I bought more again the next day when the market went even higher.

But this was not any new information. We knew back in March that they would be buying bonds. So it seems as though these announcements are released strategically to jawbone the market higher, like also the announcement that Trump might have a $1 trillion infrastructure bill. The week before Powell announced 0% interest rates thru 2022. Well, duh. This was not a revelation to anyone paying attention.

Remember back in 2019?

“Stocks higher on news of impending trade deal.”
“Market surges because a trade deal is expected any day now.”
“Trump had a phone call with Xi and said it went well. Stocks higher on news.”

Of course if you keep lending money to the insolvent companies they will keep losing money. These companies should have died in 2008.

I am unsure if this is some master plan to establish a technocracy where market prices are dictated by fiat or if they are just winging it and trying to find bag holders before this collapses. The prospect of the first is horrifying but I question whether they really have the ability to pull it off.

Could you imagine if the Fed announced a withdrawal of all support? The market would go down by 90%, if it could even manage to remain in existence.

Let me know if I misunderstood your questions.

classical_Liberal
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Re: Psychological challenge of sticking with a volatile portfolio

Post by classical_Liberal »

nomadscientist wrote:
Thu Jun 18, 2020 4:20 pm
To flip question on its head:
It's a good question. Though, I'm uncomfortable with the word "superior". If we define it as a country or region whose culture seems to provide superior growth in corporate earnings, I'd be more comfortable. That's really my point.

Places like Japan, Taiwan, and Developed Europe who make up a huge parts of nonUS market cap seem to have some growth issues due to varying cultural trends. Demographics, culture, high geopolitical risks, ect. Self admittedly I do not have "feet on the ground" in those places. So the info i get is from various forms of media, people I know from those places now in the US, and statistics. All of those things tend to make me believe that valuations are lower in these places for very good reasons... and then there's the last decade of performance too. I'm certainly open to the fact that I'm missing something.

Anyway, to your question. If the US had performed poorly over the past decade vs these developed international, but the above mentioned fundamental were unchanged (ie demographics, culture, geopolitical risk, USD as reserve currency), then I would see the US as a superior investment despite it's underperformance. The caveat to this is that it's likely these underlying conditions (or at least the perception of them by investors) that have directly caused the discrepancy in valutions, so it's really hard to answer.
Last edited by classical_Liberal on Thu Jun 18, 2020 4:49 pm, edited 1 time in total.

classical_Liberal
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Re: Psychological challenge of sticking with a volatile portfolio

Post by classical_Liberal »

Thanks for the answer. Yes we've has this corporate debt for awhile, but look at where the market cap:GDP went "wacko".
Mister Imperceptible wrote:
Thu Jun 18, 2020 4:33 pm
Right now we have:
-Record low corporate tax rates
-Record debt levels (added by me: Plus low rates)
-Global supply chain dependent on cheap foreign labor.
This is my point, don't these things directly lead to higher market cap:GDP? If this remains a status quo, wouldn't it reflect the possibility of higher MC:GDP ratios going forward. At least as long as it's sustainable? I realize you think it isn't sustainable for long, that's not really my question.

nomadscientist
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Re: Psychological challenge of sticking with a volatile portfolio

Post by nomadscientist »

@classical_Liberal

Sure, I am not trying to call you a raving nationalist or worse. It was a poor choice of word by me. I meant "better at returning money from publicly traded companies."

Thank you for the answer.

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Mister Imperceptible
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Mister Imperceptible »

Yeah, if they lowered corporate tax rates and Fed started buying all corporate bonds and eventually bought stocks they would move prices higher. That is what the bulls are banking on.

Take a look at this:

https://www.longtermtrends.net/market-cap-to-gdp/

Look at where we were in 2008 when these policies really ramped up and where we are now. And consider the current record inequality and polarization to the point it feels like we have a non-working society. It is really hard for me to imagine this going further without the US become more dystopian and eventually imploding.

It seems easier to just front run the Fed by buying distressed bonds at 30 cents on the dollar in March and then selling them back to the Fed several months later at 85 cents on the dollar. After all, they own the Fed- they receive all the inside information and can change the rules in the middle of the game. Ultimately I think it is easier for the rich to do that than to push asset prices to infinity. Because without new buyers at ever higher prices the pyramid will collapse.

The lower classes in the US were already pauperized. This is about raiding the upper middle (servant) class. Right now “stocks only go up” and “buy the dip” have been reinforced. I am pretty sure this does not end with the retail bros following David Portnoy winning. The house always wins.

classical_Liberal
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Re: Psychological challenge of sticking with a volatile portfolio

Post by classical_Liberal »

@MI
Yeah, that was what I was looking at.

If the corporate bond purchases are only the beginning, and the Fed starts buying equities (maybe in the next crisis? or sooner?), what we really have is a partially monetized equity market. One that can be completely (not just partially or indirectly) controlled by Fed policy. Now that'd be great for anyone invested at the time it happens, assuming the Feds goal is market stability/growth. I mean, why else would they do it? This could lead to market valuations in the US we've never seen before. Because, Fed stability, it's basically like treasuries at that point, and capital earnings yield would reflect that.

Eventually this will cause the US to lose reserve currency status, because of a monetized equity market with 25%+ zombie companies. That will, in turn, lead to the economic downfall of the US. I guess my point is, if this is going to happen, why not ride the wave for awhile? The only reason to bet against it now, is if you think it's not going to happen and we see a mean reversion (plus some) as polices move back to historical norms.

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Mister Imperceptible
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Mister Imperceptible »

The virus shutdown was a useful political cover for the $3 trillion bailout thus far. They would need another crisis to justify throwing away pretenses and buying equities. Maybe they were planning a second wave virus shutdown but that seems untenable now after it seems that protesting police brutality makes you invulnerable to the virus. We would likely need some other crisis to blame it on that causes a major drawdown before the Fed intervenes again. I suppose Jeff Gundlach and John Hussman getting mad on Twitter and saying it is illegal goes unheard, they just need an excuse. And before that happens, Portnoy and the bros will likely get thrown overboard in a shakeout.

Lucky C
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Lucky C »

Anyway, any more recommendations for overcoming psychological difficulties of a volatile (about as volatile as 100% equities) & unusual portfolio?

classical_Liberal
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Re: Psychological challenge of sticking with a volatile portfolio

Post by classical_Liberal »

@lucky C
Sorry for the derails

Indirectly that's really what all this discussion it about. Identify macroeconomic indicators and policies that backup your "risk" in going against the trend. To avoid confirmation bias, talk to other people who think this information may lead to different results or if they have other information. Then, if you begin to not believe in your unusual portfolio, maybe there's a good reason for it.

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Mister Imperceptible
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Mister Imperceptible »

Going back to the comparison to poker. If you play your hands the way they are supposed to be played you are still going to have bad breaks and lose hands. I assess my play and the players as I go but I keep playing the odds.

ZAFCorrection
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Re: Psychological challenge of sticking with a volatile portfolio

Post by ZAFCorrection »

I'm probably the laziest and most incompetent investor around here, but I have two pots of money, one of which gets allocated to positions which seem reasonably valued (using non-existent ZAF logic) and another which gets allocated to the even stupider ideas like chasing after momentum and what reddit/twitter is saying (buy more SPCE). Fussing over the second smaller pot usually gets me to leave the larger one alone for long stretches of time.

My theory is you need some kind of toy to play with so you don't dig up the yard.

plantingtheseed
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Re: Psychological challenge of sticking with a volatile portfolio

Post by plantingtheseed »

Lucky C wrote:
Thu Jun 18, 2020 5:38 pm
Anyway, any more recommendations for overcoming psychological difficulties of a volatile (about as volatile as 100% equities) & unusual portfolio?
Yes, buy the company (or companies) of interest at below its value. I sleep well.
Last edited by plantingtheseed on Thu Feb 18, 2021 10:02 am, edited 1 time in total.

shemp
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Re: Psychological challenge of sticking with a volatile portfolio

Post by shemp »

@classical_liberal: I mostly just assume the world is not actually going to collapse and life will change slowly rather than rapidly with time, so old line value companies at PEs of 16 will continue to churn out profits like they always have, and PE of 16 is typical of the world ex US big tech.

Because I spend much of my time outside the USA, I'm aware the USA has a crappy standard of living despite its swollen per capita GDP in PPP (purchasing power parity) terms. If you get fat and have a heart attack, GDP soars because of massive healthcare spending. Whereas if you stay healthy by engaging in no cost exercise like walking around a liveable European town, GDP goes nowhere because no one is consuming. GDP does not measure quality of life. That is one issue with the mighty USA. There are others, though the USA also has strong points.

As for "software eating the world", Buffett figured out what this really means long ago. Namely, software is way more powerful in destroying profits than creating them, in the long run. Think Amazon destroying bricks-and-mortar retail, only to be someday destroyed itself because of competition from Walmart.com, etc. None of the big computer companies of the 1960's are still at the top, not even the mighty IBM, despite its network effect and switching cost moats. Meanwhile, Altria is still selling those nasty cigarettes and will continue doing so for decades to come. So I want little to do with big tech at very high PEs.

Computer programming was my profession, BTW. Even ran a software company with 99% margins on sales of a program I had written. Did well for a few years, pocketed big profits, then competition moved in and technology changed and that was the end. Typical software story, other than that most guys fail to pocket profits while the good times last because they think those good times will last forever. I've personally experienced both the upsides of software (99% margins!, easy to grow rapidly from nowhere to market dominance) and the downsides (moats are weak, rapid obsolescence of existing technology, trend toward price of zero, etc).

Lucky C
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Lucky C »

classical_Liberal wrote:
Thu Jun 18, 2020 5:49 pm
To avoid confirmation bias, talk to other people who think this information may lead to different results or if they have other information.
Yes, good points. I need to take a step back not only from news/Twitter feed bubble but also my Excel spreadsheet tunnel vision. I have run sensitivity tests of my strategy by tweaking different numbers, swapping one historical data set for another similar one, and running a Monte Carlo analysis, so I consider it technically robust. However I should "red team" my own strategy and come up with other ways that it could fail or just be the wrong thing to do in general.

Since I am not value investing, I could add a value investing component to my portfolio as a non-correlated strategy and SWAN as others suggest knowing that I am doing the right thing in terms of what an investor is supposed to do. There are a few reasons I am not a value investor and one is that I do not have confidence in my skill level in that space. If I work on those skills for a couple years, maybe that will also coincide with a market environment that's more favorable to value investors, compared to today.

Dave
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Dave »

Lucky C wrote:
Fri Jun 19, 2020 6:02 am
...maybe that will also coincide with a market environment that's more favorable to value investors, compared to today.
I'm not sure you're thinking about this the right way. The fact that "value investing" has not worked (i.e. beaten major indexes) for a while suggests this moment right now may the best time to implement it - reversion to the mean/etc. If you get under the hood of the market, you'll see that many categories (I'm simplifying but let's say small/mid caps, and non-"tech" sectors) of stocks have actually performed quite poorly this year, and not even that great the last several years. From a prospective return basis, this would suggest that over the next 5-10 years these groups may outperform the broader indexes that are naturally weighted heavily towards mega cap tech.

In other words, in several years, it may be too late as the excess returns will go away by the time this reversion becomes clear. Obviously the current trend can continue for a while, who knows, but I'm a "value investor" and I try to look out 10 years, and it's clear to be that the S&P 500's prospective returns over the next decade are likely to be meaningfully lower than their historical performance, while I see many stocks out there with a path to >10% returns for a long while to come.

So while index prices are elevated and perhaps across-the-board equity returns will be muted in the next decade, I think right now is actually a great time to be a value investor, especially on a relative basis but also on an absolute basis.

This is by no means suggesting rapid changes in portfolio strategy, but just something to think about. The idea of waiting until the trends turn is harder to implement in practice than in theory, and in systems with reversion to the mean (e.g. markets) the fact that something (value investing) hasn't worked well in a while may be a strong indicator. You just have to be comfortable waiting for a while, perhaps a long time. But you're going to be investing for a long time anyways, better to have the probabilities on your side.

Regarding the OP. My portfolio is extremely volatile - I have over half my net worth in 3 stocks. I think concerns of portfolio volatility is more of an issue for "asset allocation" strategies where you own an amorphous pool of financial securities that you really don't (can't) understand well. If you are a bottom-up stock picker and do your homework, you know what you own and what the risks are. Price volatility is meaningless. Obviously you can still be wrong about things or the business outcome could be on the worse end of the expected distribution. This is part of the whole "think like a business owner", etc. For example, say you owned a small plumbing business and it generated $100,000 per year of profit. You're not a financial analyst, but you think this is worth something between $400,000-$800,000. If someone comes up to you and offers $200,000, you'd laugh and decline their offer. This is the correct way to think about price volatility - the Mr. Market story - but it's harder to have this unless you have a deep understanding of what you own beyond historical performance and asset correlations. So I don't have advice for owning funds, but if you get into value investing and own individual stocks or bonds, you may find some of concerns of volatility are not as big of a deal.

Lucky C
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Lucky C »

Dave wrote:
Fri Jun 19, 2020 2:42 pm
it's clear to be that the S&P 500's prospective returns over the next decade are likely to be meaningfully lower than their historical performance, while I see many stocks out there with a path to >10% returns for a long while to come.
Does this imply that the market should be more "efficient" in a few years than its current state that some may say is absolutely bonkers? I agree that is likely to be true. I also agree that so-called value stocks have a good shot of outperforming so-called growth stocks, after underperforming in the past decade. I agree that the stock market return will likely return around zero over the next decade, but I have 0% confidence that I have the skill required to identify the individual stocks that will return over 10% per over the next decade.

Though the market does not appear to be very efficient at this point in time, I would have to consider my value stock-picking skills to be world-class in order to confidently predict that my picks will beat the overall market by several percentage points per year - that the market is not only that inefficient but that little old me can outcompete all the other value-conscience competitors.

What I would prefer is an environment where the overall stock market is at a much lower valuation (say half of what it is today based on CAPE or Market Cap to GDP or whatever) but is more efficient. I would rather try to beat the market by 1% when expected returns due to valuations are 9% than beat the market by 9% when expected returns are 1%. As an extreme example, would you rather be a great investor in 1929 or a mediocre investor in 1982?

This is not to argue your points as I agree with them and hope that I can be a confident value investor and be comfortable holding large allocations in individual stocks like you some day. I just hope that at some point in the near future the expected returns and dividend yields of most stocks are closer to the historical average. A small basket of stocks with both high and durable dividends would make the bumpy rides of price movements much more comfortable.

shemp
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Re: Psychological challenge of sticking with a volatile portfolio

Post by shemp »

Dave wrote:
Fri Jun 19, 2020 2:42 pm
... My portfolio is extremely volatile - I have over half my net worth in 3 stocks. I think concerns of portfolio volatility is more of an issue for "asset allocation" strategies where you own an amorphous pool of financial securities that you really don't (can't) understand well.
Nothing wrong with pools of securities if you take the right attitude. VTV ETF, for example, can be thought of as a single conglomerate business rather than "an amophous pool". Parts of this conglomerate will decline, parts may suddenly go bankrupt, others will plug along indefinitely, a few pieces may become much more profitable in the future. As a whole, this conglomerate should return 4%/year in real terms over the next 20 years, given current PE of 16.6. This conglomerate has risen in price about 4%/year in nominal terms since 2015, while throwing off 3% dividends, so about 5%/year total return in real terms given 2%/year inflation since 2015.

BRK-B, which is one of the major components of VTV, is itself a conglomerate business. Only about 2.7%/year total return in real terms since 2015, but likely will do much better in the future, thus catching up to rest of VTV.

Like Lucky_C, I have little confidence in my ability to pick individual stocks better than average, so why not just accept average by buying index funds, and thereby increase diversification? Markets are mostly efficient, in my opinion, other than when bubbles occur because money controlled by short sellers is much less than money controlled by foolish herd. Right now, big US tech stocks might be a bubble. Thats why I am in VTV, VOE, VBR (large, mid, small US value stocks) rather than VTI (total US market). I also think the USA might be a bubble compared to the rest of the world, which is why I am 70% non-US stocks. There is no pool of short sellers big enough to short the entire US stock market successfully, which is why such a bubble is possible.

Bubbles, due to shortage of short sellers, are more likely violation of efficient market theory than bargains, IMO, because there is plenty of money controlled by long term oriented value investors ready to pounce on bargains. So I focus on avoiding bubbles when buying, possibly take advantage of bubbles by SLOWLY selling into them, and otherwise just diversify widely using low cost index funds from Vanguard. And getting back to the OP and how to handle volatility, I think of my amorphous ETFs as single conglomerate businesses, by focusing on the P/E, P/B, and similar ratios of each ETF as a whole. Then I think like an owner with respect to that conglomerate, as Dave discussed.

Laura Ingalls
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Re: Psychological challenge of sticking with a volatile portfolio

Post by Laura Ingalls »

I check my balances far too often. I am also wired far too anxiously. Oddly I do pretty well with volatility. My mantra is, “We have more money now than when we started this semi-retirement project and we are x years closer to the end (whenever the end is?)”

nomadscientist
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Re: Psychological challenge of sticking with a volatile portfolio

Post by nomadscientist »

https://www.vox.com/recode/2020/1/29/21 ... oy-chernin

Portnoy seems to be worth up to half a billion, so he is paying with peanuts and will cash in on the publicity.

plantingtheseed
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Re: Psychological challenge of sticking with a volatile portfolio

Post by plantingtheseed »

One of the most troubling issues with index/asset allocation is how it has evolved to accept that risk is simply the variance (of return) from the mean. Only if life were that simple. The way it looks at the past "risks" to predict future "risks" presumes that future will simply be a repeat of the past. Not to mention that the model fails miserably, when faced with the non-normal distribution of asset returns that reality brings.

But the biggest problem facing asset allocation is how widely accepted it is as the "optimal solution" to investing, in terms of risk to return. Since the index can't be beat, just index and you'll be safe. Will you be safe? Think about it. When everyone starts to implement the same "optimal" strategy then that means the system as a whole is synchronized, meaning, it is not optimized. Everyone is exposed to the same risk that the system is exposed to. Every. one. We've already seen this in the 2008 housing crisis with credit default swaps. We've seen it before with nifty-fifty. We will see it again with indexing/asset-allocation. (can't take credit for this observation, but when this was pointed out, had a light bulb moment)
Last edited by plantingtheseed on Thu Feb 18, 2021 10:05 am, edited 1 time in total.

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