All-In and All-Out
- Joshua M Brown
- October 14th, 2011
All-In is a stupid investment posture, so is All-Out.
I get asked about the fact that I’ve been pretty vocally bearish for the last few months yet maintain positions in stocks. “Given your concerns about China and Europe and recession potential, why are you still 50% long stocks here?” People don’t like nuance, it screws with with the way our minds are supposed to work.
It’s much easier to reconcile all-or-nothing opinions or stances, this is why a meathead like Sean Hannity has fans – no matter what the issue is you already know he’s to the far right of it with no frittering around in between, ever. No nuance, no conditions, no qualifications – just black-and-white certainty. It’s a great character to play on television, if he’s truly that big of a moron off the air then I give him a lot of credit.
Anyway, the Bull-Bear thing works the same way. It rarely pays over a considerable time period to be 100% in or 100% out when you manage money for others the way I do. There are as few reasons for this:
1. You’re not god, you’re not a clairvoyant, if you’re caught all-out and the S&P has a plus-6% week, you better hope you’ve caught at least some of that, it could be the entire year’s gain!
2. When you go to 100% cash, something changes in your mind. You get to this place where mentally you won’t be satisfied unless you pick the perfect entry point. It’s harder to do some buying at 100% cash than it is at 75% cash or 50% cash – at least then you’re “adding to positions” rather than taking a stand from scratch. Price will drive you crazy without an existing position or average cost to anchor you, whether it’s higher or lower than the current quote.
3. There are high yields being paid on tons of stocks, yields in excess of what the bond market is offering. When you buy a building in the commercial real estate market, you are buying it in large part for the rental income it will produce. Sure you’d like to sell it at a higher price one day but there are no quotes online for what it’s worth on a day to day basis. You except the fact that on any given week or month the building may be worth less than the week or month before. But the rents are rolling in and you don’t have to pay attention to the swings in value on a daily basis. Can you do that with stocks? You should certainly try to in some cases. If you own a non-cyclical stock with a 4% yield and you’ve bought it at a Shiller PE10 ratio of 8 or 9, what the hell do you care if it’s up or down a few bucks in a volatile tape? You’re still getting paid and there’s no reason to react to the vicissitudes of the market today or tomorrow. Think like a landlord, not a little bitch.
4. There’s a tendency to pay closer attention to things when you’ve got money on the line, and a tendency to be lackadaisical about things when they aren’t making or costing you money. If you’re 100% out of the stock market, you’re also 100% excused from having to pay attention to it – and you probably won’t. Picture watching a football game between two teams in another conference and neither one of them means anything to you as a fan – it’s just a game and you can take phone calls, return emails, maybe even go out and pick up a sandwich. Now picture you have $500 riding on one of the teams, teased with a bet on the under…you think you’re going to watch that game more carefully? Hell yeah you are. When I see a stock I think I like and want to commit to researching further, I throw a hundred shares in the “A account” sometimes as a tether line that keeps it in my sights.
5. In real estate, they say Location Location Location. In the stock market it’s Timing Timing Timing. Everything is timing, it’s what makes the guy who bought Apple in 1996 a loser and the guy who bought in 2003 a genius – same stock. If you bought Wal-Mart in 1999 thinking they could triple their earnings over the next decade, guess what – you were right! But you made zero dollars, because while earnings tripled the price-to-earnings multiple contracted by 80% producing a flat share price over 12 years. That’s timing. If you’re endeavoring to be 100% on the timing of your equity purchases and sales then you’re playing the wrong game. The average investor should be striving for maximum upside capture with minimum drawdowns and volatility. Easier said than done, but for most people that’s the game – not pretending to be Paul Tudor Jones.
There are guys like Joe Fahmy who run a very specific momentum style and for them it might make sense to go 100% to cash when the market acts “unhealthy”. For those running stock mutual funds, in many cases it’s their job to be 100% exposed to the market at all times, by the terms of their charter they can’t be anything but All-In.
But the rest of us don’t have those restrictions, we can be 30% in, 50% in, 65% out, 28% long and 44% short etc. We can modulate our exposure as we go, assuring that we’ll never be fully exposed to a nasty fall or completely on the sidelines during a rip-your-face-off rally.
This isn’t just market sense, it’s common sense.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.