Category Archives: Quarterly

Topley’s Top Ten – July 10th, 2019

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1.Tech Funds Second Largest Weekly  Inflows Ever.

From Dave Lutz at Jones Trading.

Continue reading

Topley’s Top Ten – July 1st, 2019

1.S&P Top 10 and Bottom 10 Performers YTD.

Retailers Bunched Up in Bottom 10

From Nasdaq Dorsey Wright

2.Another Stock Group that is Well Below Highs….Microcaps.

Microcap ETF well below highs…Private Equity Holds All the Microcap Today

3.July 1 2019 Kicks Off Official Longest Economic Expansion Since WWII.

Holger Zschaepitz‏ @Schuldensuehner 1h1 hour ago

Tomorrow is July, which means that we will officially be entering the longest economic expansion the U.S. has ever seen. …

4.What Factors are Cheap and Expensive Versus 10 Year and 35 Year History

Value and Small Cap Cheap?

5.The Median Age of Tech Companies Going Public in 1999 was 4; Last Year it was 12


 Initial offerings could raise a record level of capital in 2019, potentially breaking the nearly $97 billion record set in 2000. But Wainwright, and IPO investors, have returned wiser and more disciplined.

In a sense, the IPO market has simply grown up. For one thing, the median age of tech companies going public in 1999 was four; last year, it was 12. And having been burned in the bubble years by IPOs for wildly speculative and ultimately failed businesses, such as and eToys, investors have tightened their standards. They now want established businesses with substantial revenue and high growth.

The RealReal Is No and Today’s IPO Market Is Not the Next Dot-Com BubbleBy Eric J. Savitz

Flashback to 1990’s IPO Boom

6..80% of the stock market is now on autopilot

PUBLISHED SAT, JUN 29 2019  8:30 AM EDTYun Li@YUNLI626


  • Passive investments control about 60% of the equity assets, while quantitative funds — those relying on trend-following models instead of fundamental research — now account for 20% of the market share, according to estimates from J.P. Morgan.
  • Passive funds have attracted $39 billion of inflows so far this year, whereas active funds lost a whopping $90 billion in 2019, the bank said.

It’s no secret that machines are taking up a bigger and bigger share of investing, but the extent of their influence is approaching shocking proportions. It is as high as 80%, according to one major investing firm.

Passive investments such as index funds and exchange-traded funds control about 60% of the equity assets, while quantitative funds, those which rely on trend-following models instead of fundamental research from humans, now account for 20% of the market share, according to estimates from J.P. Morgan.

This means so much of stock trading is now in the hands of automated buyers and sellers that the market is increasingly sensitive to headlines and more prone to sharp price swings, many notable investors believe.

Omega Advisors founder Leon Cooperman previously said computer trading is creating a  “Wild West” with the markets, calling for an investigation by the Securities and Exchange Commission.

DoubleLine Capital CEO Jeffrey Gundlach has taken a shot at passive investing, saying it is causing widespread problems in global stock markets. He called it a “herding behavior.”

“I’m not at all a fan of passive investing. In fact, I think passive investing … has reached mania status as we went into the peak of the global stock market,” Gundlach said in December.

While algorithmic models have gained popularity on Wall Street, low-cost passive vehicles keep raking in assets from Main Street. Passive funds have attracted $39 billion of inflows so far this year, whereas active funds lost a whopping $90 billion in 2019, according to J.P. Morgan.

“The pace of outflows from Active is at a cycle high while the pace of passive equity inflows has bottomed and [is] beginning to reaccelerate,” Dubravko Lakos-Bujas, J.P. Morgan’s chief U.S. equity strategist, said in a note on Friday.

7.Can The Fed Cut With Stocks Up Big?

Posted by lplresearch

The Federal Reserve (Fed) will likely cut rates at its next meeting in late July. This begs the question: Will the Fed really cut rates with stocks up so much year to date and near all-time highs? “It might sound strange for the Fed to cut rates with stocks up a lot for the year,” explained LPL Senior Market Strategist Ryan Detrick. “But since 1975, the Fed has cut rates 26 times with the S&P 500 Index up at least 15% for the year, most recently in 1995 and 1998.”

Here’s the catch: A year after those cuts, the S&P 500 was higher 23 out of 26 times—with a very solid average gain of 13.4%. So it would appear monetary policy could be a continued tailwind.

As our LPL Chart of the Day, “Will the Fed Really Cut Rates When Stocks Are Up Big?”, shows, rate cuts when stocks have been up big for the year have actually occurred quite often over the years.

8.Oregon Supply of Weed Running 2x Demand

Oregon Has So Much Extra Weed it Could Take Years to Smoke it All


MAY 31, 2019

SALEM, Ore. — Oregon is awash in pot, glutted with so much legal weed that if growing were to stop today, it could take more than six years by one estimate to smoke or eat it all.

Now, the state is looking to curb production.

Five years after voters legalized recreational marijuana, lawmakers are moving to give the Oregon Liquor Control Commission more leeway to deny new pot-growing licenses based on supply and demand.

The bill, which passed the Senate and is now before the House, is aimed not just at reducing the huge surplus but at preventing diversion of unsold legal marijuana into the black market and forestalling a crackdown by federal prosecutors.

“The harsh reality is we have too much product on the market,” said Democratic Gov. Kate Brown, who intends to sign the bill if it wins final passage as expected.

Supply is running twice as high as demand, meaning that the surplus from last year’s harvest alone could amount to roughly 2.3 million pounds of marijuana, by the liquor commission’s figures. That’s the equivalent of over 1 billion joints.

9.Amazon Share of Digital Advertising.

THE RISE OF AMAZON ADVERTISING: This is exactly what Amazon is doing to siphon billions of ad dollars from Google and Facebook and why brands love it

Audrey Schomer

Jun. 4, 2019, 1:07 P


Marovember 19, 2018 Mark Manson

Mark Manson

One massive plot of land out in the frigid wasteland of the northern Yukon and build a vast complex of unnecessarily poorly-designed buildings. There will be no roads that lead there. No utilities. No central heating. And insufficient staff to maintain the structure. I’ll then call it, “The Hall of Fame of Bad Decisions.”

It will be perfect. Because not only will the hall itself be a bad decision, but anyone who ever attempts to visit it will clearly be making a bad decision as well.

Inside the hall, we will have exhibits for all of the worst decisions ever made. There’d be one for that time when Kodak, despite owning 90% of the market share of the camera industry and inventing the digital camera, decided not to sell them and went bankrupt as a result. There will be another for the time when Decca Records passed on signing The Beatles because they thought “guitar bands are on the way out.” There will be a whole wing for stupid military leaders who tried to invade Russia. And we’ll have a special “Tiger Woods” wing where we rotate in/out celebrities who wreck their own careers by doing something exceedingly dumb.

It’ll be great.

And I guess, while people are there, we’ll trot out a speaker or two and give seminars on how to not make such awful choices. They’ll offer some principles on how to make better life decisions.

Maybe that seminar would go something like this:


All tough decisions are essentially about weighing values. There’s financial valueemotional value, social value, intellectual value, and so on. You have to consider all of them, weighing them appropriately. And not just in the short-term, but in the long-term as well.

This “weighting” of values is incredibly difficult, largely because we struggle to see things clearly.

As a general rule, we are all heavily biased towards the short-term rewards and towards emotional value. We are biased towards our pre-existing beliefs and protecting our reputation. And we’re also bad at seeing long-term rewards clearly because it’s difficult to look past our immediate fears and anxieties. Our emotions color everything we see.

Our “default” decision-making also makes it incredibly painful emotionally to give up on something we’ve worked a long time on, or to consider that we may have been wrong for years.

The fact is, we’ve all been wrong for years. We’re all wrong about our value estimates. And until we can be honest about how wrong we were in the past, we won’t learn to make better value judgments moving into the future.

Our “default” decision-making also encourages us to avoid short-term failures, even if that means missing out on long-term successes.

No, the sweet spot in decision-making is to find the short-term failures that enable the huge long-term successes to happen in the first place. Because this is what most people are bad at. And because people are bad at it, this is where most of the opportunity lies…


Ever hear those stories of wildly successful entrepreneurs and how they had, like, 23 failed businesses before they made it big?

The lesson we’re all supposed to take from this is that persistence and hard work is the key to extraordinary success.

And sure, whatever…

Usually, we can’t help but look at them and think about how “lucky” they got. I mean, Amazon! Who knew?!

What we don’t consider is that out of those dozens of failed, half-baked business ideas were all wagers with limited downside and extremely high upside. That is, if they lose, they lose a little. But if they win, they win a lot.

Let’s say I gave you a pair of dice and I told you that if you roll double ones, I’ll give you $10,000. But each roll costs $100. How many times would you roll?

If you’re not bad at math, you would know that you should spend all the money you have rolling those damn dice.

Most people look at each decision as a single roll of the dice. They don’t think about the fact that life is a never-ending sequence of dice rolls. And a strategy that loses a lot per roll can actually make you a big winner in the long run.

Yes, you will lose the dice game way more than you win. But when you win, your winnings will far outstrip your losses, making it a worthwhile wager.

You can apply the same “risky” behavior in your life to achieve more optimal long-term results:

  • Propose “moonshot” ideas at work knowing that 90% of them will get shot down, but also that if one of them gets accepted it will be a huge boost to your career.
  • Expose your kids to difficult subjects at an early age, knowing that most likely they won’t take to it. But if they do, it will give them a huge advantage throughout their life.
  • Be excessively bold in your dating life, stating exactly who and what you want, knowing that the vast majority of people will not be compatible.
  • Buy a bunch of difficult books expecting that most of them won’t be useful or comprehensible to you, but also that, occasionally, one will completely change your life.
  • Say yes to every invitation knowing that most of the events/people will be kind of dull and you’ll just go home early, but that occasionally you’ll meet someone really important or interesting.

When you think purely in terms of the immediate result, you cut yourself off from the biggest potential gains in life. And the reason most of us do this is because of our pesky emotions. Our emotions are short-term biased. They are obsessed with the present moment. And this prevents good decision-making.


Here’s one thing I’ve noticed over the years: shitty dogs almost always have shitty owners. The dog’s level of discipline is reflected in the owner’s emotional maturity and self-discipline. It’s very rare to see a dog that’s wrecking the house, eating all the toilet paper and pooping all over the couch and the owner has their own shit together.

This is because our connections with dogs are purely emotional. And if we suck at dealing with our own emotions, then we’ll suck at dealing with our dogs. It’s that simple. If you don’t know how to limit yourself and tell yourself “no” when necessary, then, well, don’t get a dog. And if you do, don’t fucking move into my building.

Our emotions are kind of like our dog that’s living inside our head. We have this part of ourselves that just wants to eat, sleep, fuck and play, but has no conception of future consequences or risks.

That’s the part of ourselves we need to train.

Our emotions are important. But they’re also kind of dumb. They’re not able to think through consequences or consider multiple factors when acting.

Our emotions overreact to things by design. They evolved to keep us alive when we were hunting water buffalo on the savannah and shit like that. When we’re scared we want to run away or hide. When we’re angry we want to break stuff.

Thankfully, our brains evolved logic and the ability to consider the past and the future and all that great stuff. That’s what makes us humans. And not dogs.

The problem is, our “dog brain” is actually what controls our behavior. You can intellectually know that eating ice cream for breakfast is a bad idea, but if your dog brain wants fucking ice cream for breakfast, then that’s ultimately where your body is going to go.

It’s only by training your dog brain with your people brain, “No, bad Mark, ice cream for breakfast is bad, go do something else that feels good and is healthy,” that your dog brain gradually learns.

Do that enough and you have a well-behaved dog brain.

Emotions are great for giving you that umph of passion and spirit, the same way a dog is great for running and fetching stuff and being a great friend and barking when someone weird is hanging out by your bedroom window.

But the dog is limited. It needs context and direction to behave well and function. And that’s your job as the dog owner. Similarly, your dog owner brain must train the dog brain to sit down and shut up when necessary. You must give yourself context and direction. Train yourself to adopt the correct habits and make better decisions. Reward and punish yourself.

Love your dog brain (i.e., love yourself), accept your dog brain (i.e., accept your emotions), but also discipline them.

And every once in a while, indulge yourself… that’s a good boy. Yeah, who’s a good boy? Who’s a good boy? Yes, you’re a good boy.


Regret is sometimes called a “rational emotion” by psychologists. And not really because regret itself makes us more rational—at least not directly—but rather the way we predictregret is often done in a rational-looking way.1

In making decisions, we’ll often consider the options available to us, imagine our future selves after choosing one of these options, and then try to feel how much regret we experience in this simulated future state. We then run this simulation again, choosing a different option, and compare that simulated state of regret/non-regret to the others.

This ability is both a) fucking amazing when you think about it and b) incredibly useful as long as we use the most accurate and complete information available to us (by using all the ideas we’re covering here, of course).

Most of us are afraid of failing or screwing something up. But we rarely ask, “Would I regret that failure?” If the answer is “no,” then that is absolutely a risk you should pursue.

Similarly, a lot of us love envisioning massive success. But if we ask, “Would I regret never having that success?” usually we find that the answer is “no.” Only when it’s “yes” should we probably make the sacrifices to achieve it.

Sometimes, the right decision becomes crystal clear when put into these terms. Legend has it that Jeff Bezos left his cushy, high-paying job to start Amazon because it was so obvious to him that he’d regret it if he got old and didn’t at least try this whole “internet thing.” Staying at his job, on the other hand, carried a lot of future regret that was apparently quite palpable for Bezos.

I personally know a lot of people—myself included—who ultimately made big life decisions largely based on the path of least regret. These decisions are almost always described as the best decisions they’ve ever made. Go figure.

Instead of basing your decisions around success/failure, or happiness/pain, base them around regret avoidance. Our regrets are usually the best measurement of what is actually valuable to us in the long-run.


The best way to help you sort out all of your emotional drivel from actual decision-making is to write things down.

Writing things down is a simple but powerful way to clarify everything that’s swirling around in your head. I get emails from readers all the time with long screeds about the issues in their lives only to have them say at the end that they don’t need a reply because writing it all out was so cathartic and revealing for them.

The act of writing forces you to organize and make concrete all the emotional turbulence swirling around in your brain. Vague feelings become structured and measured.  Your self-contradictions are laid bare. Rereading what you write reveals your own logic (or lack thereof). And it often reveals new perspectives you hadn’t considered.

And when it comes to mulling over a decision, there are a few specific things you can write about to help you if you’re having difficulties:

  • What are the costs and benefits? First, take some time and do a good old-fashioned cost-benefit analysis of your decision. But don’t just do the old-fashioned “pros” and “cons” list. Add a couple more columns. Separate your “pros” into both long-term and short-term. Add a column for regrets associated with each decision. And note if there is any long-shot potential for success (see Principle #2).
  • What is your motivation behind the decision and is that a value you want to cultivate in yourself? All the decisions we make, big or small, are motivated in some way or another by our intentions. Sometimes this is very straightforward.

Last night, I was motivated by hunger to eat something and there was a burrito in front of me, so I shoveled it into my face hole.

Sometimes it’s not so straightforward though. Problems arise when our intentions a) aren’t very clear to us and/or b) conflict with our core values.

For example, are you buying that car because you would genuinely benefit from owning it, or because you’re trying to impress the people around you?

Or are you filing for full custody of your kids because you think it’s truly in their best interest, or are you trying to get revenge on your ex after finding out they are dating someone new?

Are you trying to start a business because you enjoy the challenges and ups and downs of making your own way, or are you jealous of your friends that have successful businesses and feel like you don’t quite measure up to them?

If you identify some ulterior motives when weighing a decision, stop and ask yourself if your intentions align with who you want to be.

And if you’re asking yourself, “Well shit, I’ve never thought about who I want to be. What should I do?” Then I think you should take out a fresh piece of paper and start writing that down.

For instance, here’s my Horrible Decisions Hall of Fame Table:

Pros * It’s funny * Oh, Canada! * Get to research celebrities with hookers Cons * Expensive * Lot of work * Really, really far away * Joke is only funny for so long Long-Term * Illiquid asset * Seriously, when am I ever going to travel to this thing? * For the rest of my life, I’ll be the “Dumb Hall of Fame” guy. Potential Regrets * DOING: Tons, lost time, money, etc. * NOT DOING: Uhh… none, really. Rep. Value * Do I really want to dedicate a huge portion of my life and legacy to being a clever smart ass? Probably not.

So there you have it. No “Horrible Decision Hall of Fame.” Why? Because it’s a horrible decision.


We all think we know ourselves well, but psychological studies show otherwise. In fact, most of us are somewhat deluded about ourselves. I put together a 22-page ebook explaining how we can come to know ourselves better, just fill out your email in the form.

You’ll also receive updates on new articles, books and other things I’m working on. You can opt out at any time. See my privacy policy.

First Crack in the Bull Market, but Don’t Get Fooled Again

First Quarter 2019

“Won’t Get Fooled Again”

I’ll tip my hat to the new constitution
Take a bow for the new revolution
And smile and grin at the change all around
Pick up my guitar and play just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again, don’t get fooled again, no no no no
Meet the new boss
Same as the old boss

Songwriters: Pete Townsend
Produced by: The Who

Key Takeaways

Don’t get fooled again by rising interest rates doomsayers.

  • The yield curve just inverted for the first time since 2007—short term rates are now higher than long term rates.
  • There’s typically a 17-month lag between a yield curve inversion and the start of a recession.
  • The curve did not stay inverted very long further confusing outcomes.
  • Markets tend to perform well during the post-inversion lag period–but stocks eventually draw down when the economy contracts.
  • Stick to your plan. Ignore the media. Buy when things are cheap and take lower but acceptable returns.

 The Yield Curve Inverts

In 2007, I was in China and purchased a statue of a bull for my home office. The statue arrived via FedEx with a crack down the middle. Little did I know that crack would be an eerie warning of the 2008-09 financial crisis—the most punishing global recession we had seen since 1929?   I’m not superstitious, but a more traditional recession indicator flashed negative soon after my damaged shipment arrive from the Far East–the yield curve had “inverted.” In other words, rates on long-term (10-year) Treasury bonds were actually paying investors less than short-term (3-month) notes were. As we’ll see in a minute, this phenomenon has happened at least five other times over the past 40 years, and each time a recession has followed.

A similar inversion just occurred at the end of March 2019 while U.S. stock markets had rebounded nearly 20-percent from a recent bottom and the bond markets were on a win streak as well. Does that mean another recession is looming? Quite likely it is, but there are some important caveats to consider in terms of timing, severity and what you should do with your portfolio. The markets like life are never easy.

First, it’s important to remember that not everyone uses the same definition of “inversion.” Like the San Francisco Fed, I consider it to be when the yield on 3-month Treasuries is higher than the yield on 10-year Treasuries. According to the Cleveland Fed, inversions of that 3-month/10-year spread have preceded each of the past seven recessions, including the 2007-2009 contraction. The Cleveland Fed acknowledged there have been two false positives — an inversion in late 1966 and a “very flat” curve in late 1998.

What does the yield curve really mean?

The 10-year rate is set by market supply and demand as investors determine the equilibrium point of where that 10-year rate should be. But, the 3-month rate is set not by market forces, but by policymakers at the Fed. As the old saying goes, when investors are scared, they run to the 10-year and when the Fed is scared it raises short-term interest rates. These two forces collide to invert the curve. As a result, when short-term rates are higher than longer term rates, investors are indicating that they’re cautious about the future of the economy and they don’t want to tie up their money.

Yield Curve is Not a Timing Mechanism

The problem with using the yield curve blindly as a recession indicator is that there is historically a lag of 10 to 24 months between when the yield curve inverts and when the economy limps into a recession (see below). More importantly, you don’t want to head for the hills immediately because markets tend to perform very well during that initial post-inversion lag period to the tune of PLUS 15 percent on average (see subsequent chart).  Here are the start dates for the five previous inverted yield curves along with the beginning of the ensuing recessions:

Source: Ben Carlson, A Wealth of Common Sense

As you can see, there has been a substantial lag from the time of the inversion until the start of the recession in each of these instances. The average number of months was 17, meaning it took about a year and a half for the economic slowdown to hit after the yield curve inverted. Again, history shows that markets tend to perform very well in the initial year or two following an inversion.

Source: Ben Carlson, A Wealth of Common Sense

As mentioned earlier, the average return during these lag periods was a gain of more than 15 percent. There was just one downturn which occurred after the dot-com bust in the early 2000s. Although the stock market doesn’t need to see a recession for a large correction, it’s a safe bet that an economic contraction will lead to a draw-down in stocks.

What does it All Mean?

I know what you’re thinking: “Thanks Matt. You just hit me with a bunch of financial gibberish that I don’t understand and have thrown out some conflicting signals.” I’ll make it easy: It appears we have our first serious recession signal in over a decade, so we should take this indicator seriously. However, the other Fortis recession signals are not yet flashing red:

  1. Wage growth is still below 4 percent.
  2. Inflation is not accelerating.
  3. Initial jobless claims are not rising, and
  4. Inventories are up, but not at recession levels.
  5. Bonus factor- the yield curve only stayed inverted for a couple days.

Our 4th Quarter Letter encouraged investors to be aggressive and take advantage of the near 20 percent correction in the markets. Over that time, as U.S. market valuations pulled back to median levels, we said the probability of a significant rally following a bad quarter would be quite high (see below grid). We followed that Q4 letter with our first webinar for investors that discussed in greater length the opportunity at hand. As most of you know, the first three months of 2019 ended up being the best quarterly return for the Dow and S&P 500 in a decade.

Source: Ben Carlson, A Wealth of Common Sense

Looking Ahead?

While we can’t avoid a recession forever, we’re not likely to endure a downturn as punishing as we had in 2008. Bank balance sheets are in rock solid shape. American citizens have been cutting debt aggressively, resulting in stronger personal balance sheets than we’ve seen in many years. But we have to be disciplined, because the probability of a cyclical recession is rising and there is a strong likelihood of lower portfolio returns after a decade of euphoria.

At this point, employment numbers can’t get much better–we have more jobs available in the U.S. than eligible unemployed citizens. As is usually the case with markets, unemployment numbers are counter-intuitive: The time to invest is when unemployment is high. When unemployment is high, stock valuations are usually low and no one is buying equities. As Warren Buffet always says: “Stocks are the only thing people don’t buy when they are on sale.”

Interest Rates

I am sure you thought this Quarterly Letter’s theme (“Don’t Get Fooled Again,”) would be a warning about the next 2008.  It’s actually about the probability of interest rates going higher. One of the reasons the yield curve inverted is because the Fed was raising short-term rates at a time when the rates on longer term 10-year Treasuries were falling. As I mentioned earlier, short term rates are driven by Fed policymakers, while long-term rate are driven by market forces.

The chart below shows that estimates for rates under “preferred conditions” have dropped from 3.5 percent in 2018 to 2.5 percent in 2019. Further, there is ample speculation about a rate cut in 2019.

Historical S&P Returns when Unemployment Low

Estimate of Fed Policy Going Forward


Think of Fed Fund Futures as a Betting Line

The line has now moved heavy in favor of a rate cut in 2019.

Global Bond Yields Slide to Fresh Lows Following ECB Comments

As the Wall Street Journal recently reported, yields have slipped as central banks have signaled they are willing to hold rates low for significantly longer than expected.

For 25 years, economists have been predicting doom due to rising interest rates. Here we are again with mortgage rates near historical lows. I am already trying to teach my kids that betting on sports is a loser’s game, but an even biggest loser’s game is making bets with your money based on expert predictions about interest rates. “Don’t get fooled again.

Since 1992, Economists Have Predicted Higher Interest Rates.  How did that work out?


Source:  Blackrock

If you do not believe me, here are Warren Buffet’s comments from his latest Berkshire Hathaway shareholder letter???


Equity investors have enjoyed a historic run over the past decade, and now it appears we have our first serious signal of a downturn.  Again, the inverted yield curve is not a timing mechanism, nor is it a 100-percent reliable recession indicator. We also have a de-levered banking system and a de-levered high-net-worth population in the U.S.

America’s wealthiest households are stashing their cash at record levels. The top 1-percent of households now have three times more money in readily available cash than the bottom 50-percent holds! The 1-percenters have about 20-times more in cash today ($304 billion) than they did before the last recession ($15 billion) according to Federal Reserve data released last week.

 We are blessed to live during a dynamic time in U.S. history. Bull markets are getting longer and bear markets are getting shorter. Most of us endured a once-in-a-lifetime recession in 2008, but came out with a record setting bull market run. When the the next recession arrives, it will most likely follow the same path as shown in the chart below.

For investors who are net savers, over the next decade, you should welcome the recession as an opportunity to buy stocks on sale. I am a firm believer in Warren Buffett’s American Tailwind theory: “Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind.  We are lucky-gloriously lucky-to have that force at our back,” quipped Buffet.

History of U.S. Bear & Bull Markets Since 1926

Final thoughts: Prepare for the years ahead

  • Stick to your plan. Investing is a psychology game, not an IQ game. Do not get emotional and have a plan.
  • Prepare for lower but acceptable returns.
  • Mentally prepare for a recession size drawdown in equities 30-40%
  • Get aggressive when stocks are on sale
  • Ignore the headlines and doomsayers.
  • Ignore politics as elections approach.
  • Don’t lever up now. Opportunities will present themselves in the near future to use your debt/margin in a more efficient manner.

As Springsteen Takes Off on Broadway, Investors Got Blinded By the Light

4th Quarter, 2018

 “She Got Down But She Never Got Tight She’s Gonna Make It Through the Night”

 Blinded by the Light

Blinded by the light
Revved up like a deuce
Another runner in the night

She got down but she never got tight
She’s gonna make it through the night


Songwriters: Bruce Springsteen

Blinded by the Light lyrics © Downtown Music Publishing

Springsteen’s off-Broadway

I recently watched Springsteen’s fabulous Broadway performance on Netflix, having seen The Boss over 20 times myself, it still was unreal to hear him tell personal stories around growing up and his career.  As I watched one of the most volatile stock market year ends in history, I couldn’t help but apply investors psyche to a Springsteen song.  Most investors got Blinded by the Light, it was just too easy, buy FANG stocks, buy S&P index, buy anything.  After 2017 being one of the least volatile years in market history including no drawdown of S&P over 3% versus historical annual average drawdown of 14%, the market sent a giant wake-up call that investing is always emotional including an all-time record almost 3% Christmas Eve smack down.  Here’s the good news, it seems she (market) is going to make it through the night as she always does, it’s not 2008 or anything close, we have some wood to chop in the short-term but valuations are reverting to mean.

2018 was a historic year for financial markets in more ways than one-first time in 27 years that stocks and bonds were both negative in the same year, worse stock market December since 1931, over 90% of investable assets were negative in 2018, and no asset class returned over 5% for the first time since 1974.

A Record Share of Asset Classes Posted a Negative Return in 2018

Investors felt pain this year across the board as diversified portfolios were nowhere to hide, in fact some well diversified holdings returned less than the S&P due to exposure to bonds, commodities, international stocks and U.S. small cap stocks.  Three of these groups were down more than the S&P and most bonds were flat to negative.  The tradtional 60/40 model was negative for the year with returns coming in 13% below historic median, if you’re 60/40 was global returns were even lower.  Target Date funds are popular and growing especially in 401k plans, see below as they are posting first negative returns in 10 years.

Diversified Portfolios Big Red Year – Target Dates Down for First Time in Ten Years

In my first quarter 2018 letter I wrote at length about tech facing its Machevellian moment in the next 12 months, mentioning that a small cadre of tech stocks were responsible for most of the markets gains which is unsustainable.   But the bigger problem was the market was due for sector rotation especially since traditional defensive sectors of market hit record low capatalization in the S&P even lower than 1999 or 2008.  This sector rotation back to defensive certainly started in the 4th quarter now the question becomes how long will it last?

Click here for first quarter letter

As popular stocks and sectors started to crumble, retail investors as in the past started to get emotional, including pulling a calendar-month record  $98 billion from U.S. based stock funds in December.  In fact it was almost double the previoius record of $48.8 billion in October of 2008.  As anyone who has read my thoughts in the past knows, investors are terrible market timers.

Investors usually sell in market panic downturns and buy when they are blinded by the light of euporia.  But as you can see from the chart below, selling during bad quarters can cost you, buying during bad quarter has proven profitable on 1yr, 3yr and 5 year periods.

The good news is that markets will most likely, like Springsteen says, “make it thru the night.”  Banks balance sheets are in good shape as are household balance sheets, the debt overhang this time around is corporate debt and private lending, not enough to spark another 2008.  This could leave us looking at a bear market without a recession or a cyclical bear market within a longer-term secular bull.  The good news on these two scenarios is that the pain will be short-lived.  For anyone who is a net saver for the next 5-10 years or more, buying opportunities will present themselves as some are already coming to fruition.

See chart below the length of bull markets versus bear markets, especially some of the shorter corrections or cyclical bears.

History of U.S. Bear and Bull Markets Since 1926

How about returns for the market after bad quarters and months like December?  The market actually has impressive returns on a 1 year, 3 year and 5year basis after a 4th quarter like 2018.  If you strip out the American depression years, last quarter was the top 10 worse quarter in stock market history.  So we should run for the hills right, contrary to the natural emotional response, instead we should channel our inner Warren Buffet and stay to a disciplined system for the long-term.

The good news about market sell off is that valuations naturally come down, as you can see in the following chart, S&P price to earnings ratios have pulled back to the mean.  Even though investors and the media love to talk in terms of the S&P, diversified portfolio holders invest internationally, across market caps in U.S., in commodities and real estate.  The even better news is some of these non-S&P asset classes are trading at 25 year lows.  Value stocks are at record discounts to growth stocks in the U.S., International stocks are trading at half the fundamental valuation measures of U.S. growth stocks and commodities are at a 25 year low valuation to the S&P.  The idea that all asset classes are expensive after this 10 year bull market is fake news.

S&P Valuations Trading Below 25 Year Average P/E

Valuation Grid

Value Stocks and International Stocks Trading at Discount to U.S. Growth Stocks.

Global Valuations as of 12/17/18


Diversified portfolios generally work well over the long-term but they are sometimes painful to hold in the short-run.  The last 10 years have been an S&P dominated investment environment, this has left some asset classes behind resulting in cheap valuations.  Investors that are net savers for the next 10 years now have an opportunity to invest more aggressively at more attractive valuations.  As one of our earlier charts indicated most investors are selling, historically this has been the best time to buy and post bad quarters data also puts probabilities in your favor for a 3-5 year horizon.

Investors should expect more volatility in the first quarter as company earnings hit the tape and the market decides whether this is a correction of something bigger.  Valuations in many asset classes have already priced in something bigger but as the song goes “she will make it through the night.”  As I like to remind readers in most letters, the S&P 500 has experienced twelve 20% corrections in the last 70 years and it’s returned 15,000%.  I believe investing is a psychology game not an IQ game, I suggest you keep your emotions in check and stick to your plan.