February 2021 Update

Our net worth rose in February 3.36% to $94,974/€78,039.

The main positive factors were a relatively high savings rate, decent but not great stock market performance, and a large refund from a January purchase. Negative factors were negatvie stock performance at the end of the month and reduced income due to the pandemic.

Our incomes remain depressed due to the pandemic. Due to lockdown measures in Germany, my wife's ability to work has been severely limited. While many of her customers are happy to work via Zoom or Skype, many aren't and are happy to delay their purchases until the day they can meet in person. Meanwhile, I earn a salary, but the extra work that often served to goose our incomes has completely dried up.

Simultaneously though, we are essentially forced to save money. The restaurants are closed. The shops are closed. I need to buy new clothes, but nowhere is open to facilitate the purchase. When I last tried, back in October, I wasn't allowed to use the changing rooms, so I bought a pair of pants, hoping they'd fit. Unfortunately, they didn't, so upon the return, I decided I'd wait until the dressing rooms re-opened. Joke's on me!

Naturally, there's always the internet for purchases, but eventually, you do run out of things to buy, unless you're willing to also buy clothes over the internet. My wife has become very adept at buying clothes online, while I lack the patience. It requires a willingness to try on and send back repeatedly. But ultimately, I might have to bend on this.

Stock Jitters

It's pretty easy to get spooked about the stock market. Valuations are high. The CAPE is high. When I look at the charts in FASTGraphs, I see just how extended some of my own positions are. Meanwhile, you have people like Michael Burry calling for Weimar-style inflation and Jeremy Grantham saying we're in an enormous bubble.

It's easy to write these folks off since doom and gloom predictions have been so wrong for so long. But at the same time, there's clear bubble behavior. I'll refrain from naming specific areas, but I'll leave you this passage from William Bernstein's latest book The Delusions of Crowds:

Financial manias can be thought of as a tragedy, like Hamlet or Macbeth, with sharply defined characters, a familiar narrative arc, and well-rehearsed lines. Four dramatis personae control the narrative: the talented yet unscrupulous promoters of schemes, the gullible public who buys into them, the press that breathlessly fans the excitement, and, last, the politicians who simultaneously thrust their hands into the till and avert their eyes from the flaming pyre of corruption.

The promoters follow a classical Shakespearean tragic path and are consequently the most fascinating of the actors. Most begin as brilliant hard-working visionaries, who intuit before others the riches that a new technology will bestow upon society. In the process of bringing their visions to fruition, they grow rich and powerful and in a capitalist society that judges men by their wealth, become their nation's lions. When the speculation runs its course and bursts, they wind up disgraced and bankrupt and usually but not always narrowly escape the jailor.

The public proves easy pickings for the blandishments of the heroic charismatic promoters. Competent investing requires a rare combination of mathematical ability, technological expertise, and, most critically, a working knowledge of economic history. Alas, people greatly prefer stories to data and facts. When faced with such a daunting task, humans default into narrative mode and perhaps the most pleasing story of all is one that involves the effortless wealth to be had from buying into a new technology.

The press falls prey to the promoters in the same way as the public. Few things corrode journalistic excellence as the ease of writing about the revolutionary ventures of brilliant businessmen, who with alarming frequency grace magazine covers first as heroes then as accused felons.

Finally, financial manias sweep into their ambit politicians whose reputations and popularity are enhanced by the economic prosperity that temporarily results from speculative excess and who not infrequently get caught raiding the cookie jar.

Getting Used to Market Drops

In the past week and a half, I've lost more money in the markets (nominally) than I ever have. I wasn't investing in 2000 or 2008, and I cashed out the few stocks I had in 2015 to help pay off the student loans before that year's turbulence hit. Right now, I'm sitting on a large net loss that I predict will become larger.

With the fall yesterday, the S&P 500 looks like it will close below the ten-month moving average. This is a fairly rare event, and it's one of those possible triggers for trend-following people to close their positions and wait things out. I'm not going to do that, but I am and have been girding myself emotionally for the potential of a big drawdown.

I don't really feel any panic about this. Maybe I'm fooling myself, and if there's a 50% drawdown, I could conceivably panic. But I suspect I won't.

Tempered by past panics

In the past year, my tolerance for big drops has improved. I had my first taste about a year ago when one of my large holdings dropped by 16% in a day and then kept falling. I panic sold, and the holding eventually recovered, much to my chagrin.

After that I held more doggedly through big drops and was rewarded. I hated holding, but I did it, and one big draw down became a big winner, which I sold for a profit when the price appreciation looked too good to be true.

And then 2018 came, and suddenly big drops for some names didn't recover. Currently, I'm sitting on some securities that are very much drawn down, and the speed with which their plummets happened feels a bit punitive. When I described how one holding has fallen 40% since April on no real news, a friend laughed and said, "It's because God hates you."

But there's also something irrational about the plummets. Many of them are falling not because of their current actual performance but because of fears of future performance or fears of their markets being encroached by newer technology players. Fair enough. But the penalties in many of these cases are extremely pessimistic, and extreme pessimism can equal good value opportunities if the world doesn't fall apart. Which is admittedly a big "if" right now.

Backtests

One exercise that also helped gird me mentally was all the backtesting I did. There are some market drops that can be mostly avoided. The dot-com bubble was one such example. If you'd bought value at that point, you breezed through that basically unscathed.

Meanwhile, 2008 was a different beast altogether. If you're long-only, the only real way to dodge 2008 was to not be there. But if you weren't there in 2008, you probably weren't there in March 2009, and if you were there in March 2009, you were rewarded. Big time.

It's not easy. But it does show that the big drops are opportunities if you're buying. And they're also something to plan for.

Dreams of cheap prices

So there's a part of me that wants to see prices really fall. Like, c'mon lads, let's do this. Since I'm still earning money, I'd love for my future money to meet much lower prices. The CAPE ratio is still high, and if we think it has any predictive power at all, all of us who are buying securities right now should be praying for it to fall.

The only people who should be hoping for higher prices are those who aren't buying anymore or who are mega-rich. Higher prices don't help young people. Higher prices don't help savers. Think about how much you've already saved vs. what you will save in the future. Which number is bigger? If it's the latter, then you should want an 80% drawdown to happen (as long as you get to keep your job) because the compounding effects of that money will be so much greater.

So to wrap up, I've been training my brain to not get too distressed about this. There's some distress, not going to lie, but it's not panic, and if I'm not panicking now considering the amount of money I've lost, I doubt I'll panic later.