One of the fascinating things about the Gospels is that despite serving as a pillar of western ethics for the past 2,000 years, many people still don’t know about them, and even fewer people read them. A message of joy and salvation is still not widely known. How can that be? Well, the Good News has been consistently blocked over the centuries by people abusing their professional position a la the Catholic Church pre-Martin Luther, some events you’d want to disassociate from (Crusades, The Thirty Years War), illiteracy, and those who simply don’t want the message spread at all.

So, if after 2,000 years the Gospels have not reached every soul far and wide, what hope do we evidence-based advisors have with our own Good News? The Good News being that forms of active management such as market timing do not work. We certainly have our work cut out for us in the spread of our message.

The Good News

When people think of market timing, they may have an image of an experienced investor waiting for price to sales (or some other ratio) to be in perfect alignment with the Lunar calendar before deploying capital into undervalued companies. This kind of analysis is fun to read about on Seeking Alpha, but the most common form of market timing I see is an investor being worried about economic news, geopolitics, or domestic politics, and then moving most or all their portfolio into fixed income.

This is not a good way to invest and is a proven way to underperform. In fact, I am convinced the way the media portrays these anxiety inducing events has made Americans less wealthy than they otherwise should be. Our Good News aims to correct that.

Below are three images that support this assessment. The first two are courtesy of JP Morgan Asset Management and show the underperformance of the “Average Investor” compared to different asset classes (I don’t have a full image of the disclosure language for the 2001-2020 data set).

The third image is from the Vanguard Advisor Alpha study and shows how investors consistently underperform even the funds they invest in, which suggests investors tend to chase returns by investing in a fund after it has produced high returns. You can easily imagine people who sold during a market decline, seeing returns go up again, and then buying-in. In other words, selling low and buying high.

This style of market timing came up in a meeting with prospects a couple weeks ago. Concerns over Ukraine, Taiwan, debt ceilings, and the 2024 presidential election were brought to the forefront. Like any red-blooded Army Reservist, I enjoy having the opportunity to transform into armchair Patton and give my opinion on the feasibility of island invasions and spring offensives. But as I was looking at this older couple an idea hit me.  

This couple had lived through events I find more terrifying than anything that has happened in my 28 years. They were teenagers during the Cuban Missile Crisis, lived through a 17-year stretch where T-bills outperformed the S&P 500 from 1965-1981, dealt with rampant inflation, had the kindest yet most incompetent peanut farmer as president, and thirty years of the Soviet Union’s nuclear posture. Judgment Day was just a miscommunication away.

All those events, which I have no desire to live through, went through my mind. Yet, the market and GDP have continued to go up. Life found a way.

And so I said, “Mr. and Mrs. Prospect, all the concerns you’ve raised are real and I don’t think our team can build a portfolio to address them. I don’t believe we nor anyone else can time these events. However, I don’t think anything you’ve said today is as scary as what you’ve already seen. Despite all the events you’ve been through, the country is still here, and the markets have continued to rise over the decades. I know you admire President Reagan and if you had invested $10,000 when he was elected and followed the fundamentals we’ve discussed, you would be significantly wealthier than you are today.”

They laughed and agreed I was right before signing up to join as clients.

Now, you can’t be that straightforward with everyone, but I think what I said is the truth. In some sense it is always Judgment Day. There is always a storm out on the horizon to scare us into inaction or prompt us to sell out. Prices will always be too high, those in elected office will always be too dumb, the commies will always be up to something, and nuclear weapons will be here with us… forever. All scary stuff, yet the proven way to success in investing is to have a diversified strategy, continue to add to your portfolio, and stick with it.

So, in the spirit of scary stuff happening but the world and markets continuing to roll along, below is a list of some concerning historical events over the past 40 years, what the S&P 500’s annual return was afterwards, and how much money you’d have if you had invested $10,000.

Covid-19 (Annualized Return: 23.87%, Growth of $10,000: $19,006)

A respiratory virus, probably accidentally released from a Wuhan Lab in China in the Fall of 2019 and possibly developed with research grants from Grand Poobah Fauci (poor capital allocation does not require malintent). The virus devastated the global economy with markets bottoming out on 3/23/2020.

Genisys/Skynet becomes self-aware for the third time on July 4, 2017 (Annualized Return: 11.68%, Growth of $10,000: $19,402)

Skynet from the Terminator franchise is always up to something. Across every timeline it desperately wants to destroy mankind in a nuclear holocaust. I’m not sure why consciousness means someone has a desire to kill their creators. Perhaps Skynet has some strange Oedipus complex. Anyway, while markets in some other timeline went to zero after the bombs dropped, markets in our own timeline have been okay.

US Debt Downgrade on August 5, 2011 (Annualized Return: 13.4%, Growth of $10,000: $45,222)

Time flies. I thought the last “major” debt ceiling battle was in 2014 or 2015, but it turns out it was back in 2011. With the Tea Party at the height of its power, the nation’s federal deficit was a major concern, and Republicans threatened to not raise the debt ceiling unless action was taken. Eventually the Budget Control Act of 2011 was passed on August 2, 2011 with its famous budget sequestration, but that didn’t stop S&P from downgrading the US federal government from a pristine AAA rating to AA+.

The Great Recession from market top of October 5, 2007 (Annualized Return: 8.71%, Growth of $10,000: $38,046)

Housing crisis, bank bailouts, and weak Keynesian policy. What couldn’t go wrong? At least Bush 41’s TARP program to rescue the banks worked and people seem to still forget or not like that we made some money back. Also, markets kept rolling, albeit slowly at first.

Skynet becomes self-aware for the second time on July 25, 2004 (Annualized Return: 9.6%, Growth of $10,000: $57,069)

Markets were closed on the weekend of July 25, so I had to use the Friday close of July 23. I suspect the S&P 500 would have bottomed out on Monday morning. Still, this is probably the most aesthetically pleasing interpretation of a nuclear holocaust. Great sound track and the view from space of ICBMs crisscrossing through the clouds was neat, but still wouldn’t recommend in practice. Markets in our timeline have continued to roll on though.

September 11, 2001 (Annualized Return: 8.48%, Growth of $10,000: $59,936)

Terrible day for many families and the country. If you are too young to remember 9/11 or were not born yet, I recommend reading newspaper articles from the days after since they really put into perspective the fear and uncertainty following the attacks on New York, the Pentagon, and Flight 93. Also, here is a link to a great book on observing decision makers during 9/11.  

Skynet becomes self-aware for the first time on August 29, 1997 (Annualized Return: 8.14%, Growth of $10,000: $76,497)

Where it all started. I have to admire Skynet’s perseverance. Nothing will stop it from trying to wipe out humanity and assassinate our only hope, John Connor. Why we can’t have some mutually beneficial economic relationship with the machines is beyond me, but 1997 was Skynet’s first failed attempt to destroy humanity. Since then, our timeline and markets have continued unabated.

Iraqi invasion of Kuwait on August 2, 1990 (Annualized Return: 10.07%, Growth of $10,000: $90,863)

With the benefit of hindsight, we sometimes forget that Saddam Hussein’s military was an intimidating force before General Schwarzkopf (do generals have this cool of a name anymore?) and the US coalition sent Saddam packing. But Iraq’s invasion of Kuwait was a significant event with the S&P 500 falling 18% afterwards.

Soviet nuclear false alarm on September 26, 1983 (Annualized Return: 10.98%, Growth of $10,000: $645,340)

Quoting from Wikipedia, “during the Cold War, the Soviet nuclear early warning system Oko reported the launch of one intercontinental ballistic missile with four more missiles behind it, from the United States. These missile attack warnings were suspected to be false alarms by Stanislav Petrov, an engineer of the Soviet Air Defence Forces on duty at the command center of the early-warning system. He decided to wait for corroborating evidence—of which none arrived—rather than immediately relaying the warning up the chain of command. This decision is seen as having prevented a retaliatory nuclear strike against the United States and its NATO allies, which would likely have resulted in a full-scale nuclear war.”

Though probably overrated when it comes to near misses since five ICBMs is not what you’d expect for a decapitation strike in a nuclear conflict, I still wouldn’t want to replay this event ten times. But markets are still rolling.