Investing Wealth

17 Investing Guru Quotes

“There is only one side of the market and it is not the bull side or the bear side, but the right side.” — Jesse Livermore

“The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them. Stand by your stocks as long as the fundamental story of the company hasn’t changed.” — Peter Lynch

“The way I figure out the economy is literally from the bottom up and from company anecdotal information, knowing that housing leads retail and retail leads capital spending. From listening to the guys on the ground. When you talk to companies and to guys who run companies, you get a whole additional perspective on the economy.” — Stan Druckenmiller

“The whole world is simply nothing more than a flow chart for capital.” — Paul Tudor Jones

“Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” — John Templeton

“The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privilege of proving conclusively that it cannot be found on this sordid earth.” — Jessie Livermore

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” — Peter Lynch

“The nature of the game as it is played is such that the public should realize that the truth cannot be told by the few who know.” — Jesse Livermore

“If you want to become really wealthy, you must have your money work for you.” — John Templeton

“Remember, things are never clear until it’s too late.” — Peter Lynch

“Every serious deflation I have looked at is preceded by an asset bubble, and then it bursts.” — Stan Druckenmiller

“The four most expensive word in the English language are ‘This time it’s different.” — John Templeton

“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.” — Paul Tudor Jones

“Never invest in any idea you can’t illustrate with a crayon.” — Peter Lynch

“Looking at the great bull markets of this century, the best environment for stocks is a very dull, slow economy.” — Stan Druckenmiller

“At the end of the day, the most important thing is how good are you at risk control.” — Paul Tudor Jones

“Go for a business that any idiot can run – because sooner or later any idiot probably is going to be running it.” — Peter Lynch


The 60/40 Portfolio is Dead

If you use an investment advisor, I’d bet that your portfolio is some derivative of the standard 60/40 allocation. That is, your portfolio is made up of 60% stocks and 40% bonds.

Yeah, you might be +/- 10% here or there and how you fulfill those broad allocations might differ from others, but ultimately most portfolios are pretty much the same. More specifically, most portfolios are exposed to the same general factors.

The 60/40 portfolio has worked fairly well over the past 40 years. After all, the world has experienced a once-in-a-lifetime secular disinflation that provided a tailwind to both stocks and bonds. In addition, the correlation between stocks and bonds generally remained low, helping to reduce volatility along the way.

Unfortunately, the 60/40 portfolio hasn’t always worked. The chart below shows the correlations within the 60/40 portfolio going back to 1883. There have been long periods during which stocks and bonds were highly correlated, largely eliminating the diversification benefits of the 60/40 portfolio.

The New Investing Paradigm

The modern asset management industry was built on the underlying assumptions behind the 60/40 portfolio. That’s because institutional memory tends to overweight recent history. Unfortunately, the next 40 years might look very different from the last 40 years.

From around 1980 to today, the world has benefited from a secular disinflation created by improvements in computing, communications and global trade. Consequently, inflation and interest rates steadily declined from the double-digit era of the early 1980s.

This long-term decline in rates was like a rising tide for all asset valuations, and provided the economic backdrop for the 60/40 (or similar) asset allocation.

Note: interest rates are a key determining factor when valuing securities. A higher interest rate results in a lower present value of future cash flows – i.e. lower asset prices.

The world is now facing a reversal of some of these trends. Massive monetary expansion, helicopter money and de-globalization are all emerging forces that could push inflation upward. While the last 40 years saw a continued decline in inflation, the next 40 years could see the opposite.

There are no guarantees of course, but this seems like it could be the next ‘black swan’. Nobody is expecting inflation. However, it has happened before. The early 1960s to about 1981 was a period of rising inflation and rising rates, as shown in the chart below.

If a long period of rising inflation and interest rates occurs again, both stocks and bonds will face major headwinds.

A Portfolio for a New Investing Era

If the 60/40 portfolio is dead, what else could investors do? Below I will examine four model portfolios using data (sourced from going back to 1970 to see what allocation can withstand both investing eras:

1. All Stock Portfolio

As the name suggests, this portfolio is made of 100% US stocks. Aggressive? Yes. But many people under 30 run portfolios that are nearly all stocks.

2. Traditional 60/40 Portfolio

First proposed by John Bogle, this portfolio splits allocation between the total US equity market and intermediate bonds. While precise allocations and fulfillment methodologies may differ, the risk-return characteristics of most modern portfolios generally align with this model – don’t let all the bells and whistles fool you.

3. Permanent Portfolio

This portfolio was first proposed by investment advisor Harry Browne as a way to provide stability throughout economic cycles. To do this, he included growth stocks, precious metals, government bonds, and Treasury bills.

This is the first of the portfolios examined that goes beyond the traditional, potentially providing stability and growth in a new investing era.

4. Golden Butterfly Portfolio

Like the Permanent Portfolio, this portfolio is meant to perform well during all investing environments. This portfolio has the higher returns associated with the All Stock Portfolio, but the lower risk levels associated with the Permanent Portfolio.

The chart below summarizes the broad asset allocation for each of the four portfolios. Note, these are just models – guidelines investors might use when constructing their own ideal asset allocation.

The Risk Experience

Despite what you might have heard, investing isn’t just about chasing returns. First and foremost, investing is about managing risk. What risks? The risk of losing money, the risk of losing purchasing power, the risk of making mistakes caused by an emotional response to volatility.

An investment with high long-term average returns is pointless if investors sell every time markets decline by 20%. Unfortunately, it is extremely difficult to manage human emotional responses to market gyrations. So portfolios should be constructed to accommodate these emotions. That means, investors crave more stable portfolios that lose money less frequently and have shallower drawdowns when they do lose money. The first chart below shows this data for the four portfolios, with the Golden Butterfly Portfolio as the clear winner.

The second chart shows the longest time to recovery each of the portfolios ever experienced. Can you imagine being underwater for 13 years? That was the longest recovery for the All Stock Portfolio. Shockingly, the 60/40 portfolio’s longest period to recovery was a whopping 12 years!

Portfolio Returns

The four charts below show the rolling 10yr forward returns for each of the portfolios going back to 1970. For example, this means that the bar over 1980 shows the 10yr return an investor would have experienced if they invested from 1980-1990.

What becomes clear by looking at these charts is that the All Stock and 60/40 Portfolios break down in certain environments. In contrast, the Permanent and Golden Butterfly Portfolios provide a much more consistent experience across investing eras.

All Stock Portfolio

Chart Source: PortfolioCharts

60/40 Portfolio

Chart Source: PortfolioCharts

Permanent Portfolio

Chart Source: PortfolioCharts

Golden Butterfly Portfolio

Chart Source: PortfolioCharts

The following chart encapsulates the entire data set into a single average, worst and best return figure. While the Golden Butterfly Portfolio average return is 1.6% (160 basis points) below the All Stock Portfolio, it provides a much more stable experience. Indeed, the Golden Butterfly Portfolio’s worst 10yr return was POSITIVE 4.1%. It is much easier to manage emotions when that’s the worst case experience.

Moving Forward

Remember, the portfolio data above encompasses two distinct investing eras. The point is to show what might work across different eras, not what worked only during the disinflationary era of the past 40 years.

The Permanent and Golden Butterfly Portfolios performed well across eras because of their allocation to gold.

Gold’s investment characteristics are very different from traditional assets like stocks and bonds. In particular, gold tends to outperform during periods in which stocks and bonds underperform. This is important as the world enters a new investing era that may not be favourable to the standard 60/40 portfolio.

Free Guide to Surviving the Covid-19 Economic Crash

The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.

This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.

I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.

Investing Wealth

Your Money IS Your Life

If you’ve managed to save a decent chunk of money over the years you’re probably wondering what to do with it.

Do you invest it? Buy real estate? Do nothing?

You’re watching the markets rise and you feel like you’ve been left out of the party. Everyone else is making money but you. FOMO (fear of missing out) is a natural reaction when you’re sitting on the sidelines.

Some people will act on that fear by opening up an investing account and putting the money to work. Over the long run that has worked for investors willing to ride out the ups-and-downs of the market. However, this is not a decision to be treated lightly.

What does your money represent?

There is a behavioural bias called ‘loss aversion’. It says that people react more poorly to losses than to gains of the same magnitude. In other worse, people prefer not to lose $10 than to gain $10.

While finance theory argues people should evaluate investments based on expected returns – the weighted average of all possible outcomes – in reality this is nonsense. Loss aversion is a behavioural characteristic grounded by millions of years of evolution.

In the past, losing a day’s worth of food could mean your family starves. In contrast, gaining a day’s worth of food (before we were able to store it) wouldn’t have an immediately positive affect on life. (Over the long-term, if an abundance of food consistently existed we’d simply add more humans.)

When it comes to your money, it makes sense to weigh losses more than you weigh gains. First of all, even a temporary decline in cash availability could lead to a missed mortgage or rent payment. This has a significant and lasting affect on your ability to enjoy life, especially if it results in homelessness.

However, losses have even greater psychological significance over the practicality of missed payments. Your savings represents all the time and energy you spent working over the years. If you’re like most people you’re not particularly fond of your job. You probably wouldn’t be there if you won the lottery.

Your savings represents all the time and energy you spent working over the years.

Your savings is what you have to show for years of pointless meetings, directionless projects, crazy commutes, stress and even physical pain. (Remember, not all jobs are at the comfort of a desk. People in the trades often have a limited span during which their bodies can handle their work.) This is time that you’ll never get back.

In exchange for sacrificing significant elements of your life, you were paid and you saved some of this money. So you can see why losing a portion of this money creates hugely negative psychological consequences. It’s your life’s work encapsulated into a single number. Watching this number decline by 50% is like losing half your working life – you might as well have spent that time playing X-Box.

What to consider before you invest.

When it comes to investing your money, unless you have a lot of time to make up for your losses (i.e. you’re young, in which case you probably don’t have much to invest anyway), you shouldn’t invest anything you can’t afford to lose. Assume your investments could decline by 50%. Would you be comfortable with that?

Of course, the wealth management industry will point to long-term average returns on stocks and bonds when pitching to clients. However, the reality is that these averages smooth out wide year-to-year fluctuations.

While it’s true that (historically) if you you simply bought-and-held the index you would have achieved these average returns, it doesn’t consider the journey that individuals experience. This is precisely why people sell their investment after losing 20, 30, 40%+. It’s a stop-loss strategy on their life’s work. Although the US stock market has never gone to zero, each double-digit decline makes that risk feel real, so investors take action.

Of course, what ends up happening is investors lock in their losses and end up underperforming the averages by a significant amount over the long run.

Final thoughts.

Forget about FOMO. Ignore your friends bragging about their gains. This should not be what drives you to invest.

Instead, consider the losses you are able and willing to handle. Could you ride through a 50% loss without worrying about funding your retirement or paying your bills? Could you handle the psychological shock of watching 30-50% of your life’s effort evaporate?

My suggestion is to start with the stash of cash you need to stay comfortable – financially and emotionally. This goes beyond emergency savings that covers a few months worth of bills. This cash stash is your backup plan in case everything else fails. The size of this stash is dependent on how you answered the questions above. A young person living at home will have a smaller stash than a breadwinner supporting a family of 4.

Once you’ve stashed some cash you can then invest the rest. Although your investment portfolio will be smaller, your results might actually improve because you’re less inclined to sell after markets decline.

Your cash stash should help you get through market madness without emotionally reacting by preserving a significant portion of your life’s work.

Get your free guide to surviving the economic depression:

The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.

This is war. I created a 17 step, 47 page guide to help DumbWealth subscribers get through this.

I originally planned on printing the guide and selling copies for $20+. Instead I’m giving this away free because I think we all need to help each other during these difficult times.