Fed On Hold Until 2022 As Market Fears Coronavirus Return, And Portnoy Vs Buffett

People don’t like pain. They also do not like to wait. In combination, these two characteristics make active investing an activity which often times lead to unsuccessful outcomes. Let’s dig in a little bit to these statements for a little more explanation. With respect to pain, if one looks at the overall percentage of investments which ultimately prove profitable, the best investors are correct about six out of ten times. It means they are wrong four out of ten times. Most investors probably get it right a little less than half of the time. As an investor, many of your positions go against you. You don’t make money on every investment. There is pain involved for people who cannot stand the fact they are losing money on a position. Now let’s turn to waiting.

There is not an investor in the world that doesn’t want their trade to go up as soon as they hit the buy button. One of the greatest investors who ever lived, Peter Lynch, found that most of the money he made during his career were with the biggest winners. Those positions were usually held over seven years or more. If you don’t have the ability to hang in there when a company isn’t doing well, or the stock isn’t performing, it is difficult to have success in equity markets.

Still, time does play a factor in the investment world. The opportunity cost of having an investment which does not perform for years has two issues which set you back. First, the poor return detracts from your overall portfolio value. Second, the capital could have been used in something else which might actually contribute to your returns versus detracting.

The other variable is the time value of money. Compounding capital at higher rates is the secret sauce to building wealth. You might look up Einstein’s point about the wonder of compound interest in case you need a little more guidance. So, the balance between having the patience to hang on to something which might ultimately prove very successful versus waiting too long and being stuck with a non-performing position requires informed judgement. We know being right six out of ten times is a good goal to shoot for, so making the correct decision about one or two situations probably will be consequential. Clearly, this investing thing isn’t so simple.

If you apply the current environment to the investing task, last week was a great example of what makes managing money such a challenge. In three days, the market dropped 2,000 points and ended up the week down over 5%. Over the last year, market participants have seen the fastest drawdown in market history, followed by the best fifty-day period. If you are a professional, you are responsible for other people’s money. When you are a fiduciary, you have the obligation and duty to be prudent and careful in how you manage clients capital. In environment’s like the current one, where there is record unemployment, massive government involvement, all kinds of variability in the multitude of sectors within the global economy, and stock specific risk, there is much to consider and evaluate. It is not easy, and it is not supposed to be. From a competitive standpoint, you are competing against the smartest people in the world, most of which have quite a bit more capital at their disposal. They have advantages you may not be aware of (training, technology, network, experience, human capital). It does not mean success is unattainable, but it does mean you need to understand what you are up against. Not easy, not supposed to be.

In the markets this week, the Federal Reserve met and made the anticipated statement that they would leave interest rates alone for the foreseeable future. Let’s call it through 2022. You don’t have to be the global strategist for Citi to understand why: a weak economy might need more government stimulus, high unemployment, small businesses under pressure, state government deficits and employment reductions. Mid-week, the street saw an uptick in virus incidence in a number of states and decided they wanted no part of the risk and decided to sell anything and everything. Financials took a big beating on the prospect of little net interest margin for the next few years. On the earnings front, the major story was Adobe’s big quarter. Macy’s and Party City did some refinancing and Vroom had a big jump with their IPO. Now, let’s turn to the amusing Mr. Portnoy.

In case you have not heard of Dave Portnoy, he is the founder of the successful media site, Barstool Sports. As we all well know, there are currently no sports available for your entertainment viewing. So, Mr. Portnoy and his millions of followers turned to the investing universe. He live streams his trades and commentary as he battles other investors using the eTrade platform. Mr. Portnoy has a few million dollars of capital at risk, and it appears he is using his own scratch. Mr. Portnoy had success investing in Spirit Airlines and Norwegian Cruise Lines when the leisure industry got hit in March. I would note Mr. Portnoy’s commentary that he has proclaimed himself a better investor than Mr. Buffett, who he believes is too old for the new generation. The wonderful thing about investing is you can do it your entire life and improve as you grow your knowledge base. One must be humble enough to learn from your mistakes as the market frequently shows you. It will be interesting to see what happens with Mr. Portnoy. I suspect Mr. Heywood’s quote might apply.