Transcript:
Paul Winkler: And welcome to The Investor Coaching Show, Paul Winkler talking about the world of money and investing. Probably later we’ll get into a little bit of election talk. I’m sure. Cause everybody’s wondering, what do you think? What do you think about the election? I think my initial thought was probably the best one sitting in my, this, this is a chair I sit in when I have breakfast and coffee in the morning. When this past Wednesday morning I was sitting there looking out this picture window and there were these deer, often in the field and the sun was just hitting them just the right way.
A Caution for Getting Too Involved in Things You Can’t Change
It’s just, you know, you have one of those mornings, you’re sitting there just watching nature and going, man. That’s cool. And you know, the thing going through my mind as I’m watching them out there in this field. That’s what you want to be. You want to be that deer that just doesn’t have a worry. He doesn’t really care what’s going on. I was talking to a client and friend this week and he was just talking about football and how, you know, betting on football. It is, he learned a valuable lesson about and I’ll paraphrase, trying to figure out who’s going to be, who’s going to win the game.
How much are they going to win? And by who the players are and all of this. And he says, you know, all week long, he’s just trying to gather data, gather data, gather data. And he’s like totally immersed in, you know, what the game is going to be, how the game is going to play out, and what’s going to happen. Who’s going to win? And then, you know, game day, he’s yelling at his whole family to stay away from him when he’s supposed to be enjoying the football game. And he can’t enjoy anything because he’s just so worked up over the outcome. And, you know, he says, you know, elections are the same way. You’re just so worked up over the outcome that you just can’t even think about anything else. And you know, the reality of it is, you know, I’m looking out there and thinking about this and going, yeah, I like that deer.
A friend once told me that he gave up media, and what he said is that it was just the most peaceful time in his life. It just has absolutely no worries, no concerns about anything when sitting there all worked up over what people were saying and, and, you know, life seems to just go on quite well without them. Now I don’t advocate totally tuning out of everything and not knowing anything that’s going on.
But I think that we can certainly get too involved in knowing what’s going on. It just can’t be healthy. You know, I just don’t see that as being healthy. It’s like watching the stock market stock market. You know, if you’re watching the stock market, I love it. An attorney was involved in some pretty high profile lawsuits, investing lawsuits and wrote a book about some of these lawsuits. And he was talking about cross-examining brokers when they were on the stand. And one of the things that he commented about was, you know, they would get up on the stand and he would ask them, so, you know, what were you doing?
Well, you know, I was watching the market or watching this area, the market or whatever he goes, what are you watching for? And of course the person’s kind of speechless as well when the market movements were. And you know, in reality, what he was trying to point out is you have absolutely zero control over market movements and you can’t predict them. So why are you trying, you know, why are you sitting there watching what just happened? It’s in the rear view mirror, it happened, you know, responding to it now is too late. And this comes back to what I always teach about watching for patterns. You know, we look for patterns in nature and it helps us survive. You know, if I see that a storm’s coming and there’s a pattern on the radar screen, that the thing this thing’s headed to me, and it’s probably going to continue heading toward me.
I mean, that’s just kind of the way the storms work, right? They typically move from West to East and they move right toward you and they’re on a trajectory. And that’s why we can predict the weather to some extent. We’re not even that great at that. We’re okay at it because there is some kind of predictability that this thing is heading this way. It’s probably going to continue to head this way. The stock market is so different because it could be heading one way, one minute. And then all of a sudden it goes the opposite direction. And you may jump on because you think, Hey, it’s going up. And you know, I would correct that. And I would say, no, it’s gone up. Or you could say it’s going down. And I would correct that and go, no, it’s gone down past tense, use past tense when you’re dealing with stock markets, because this new information that’s going to drive things.
New Information Is Unpredictable
And the reality of it is new information is unpredictable. No, you don’t know when some announcement is going to come out. That totally changes the way things are right now. And it could come out at any second because there are things going on behind the scenes that at all times, it’s in time and markets will respond to them right away. One of the graphs was this graph where you just basically see this precipitous drop in the stock market. And you know, you’ve got this squiggly line and then all of a sudden it’s straight down and then the line goes straight, back up again.
And I tell the audience, Hey, you know what, what just happened here? And there, like I have no clue. And so, well, what just happened was that there was a tweet that the white house had been bombed and it was bam. The stock market immediately responded, went straight down. Then why did it go straight back up? Because it was a false tweet. It was actually not a real story and market readjusted and went on. Like it was before no changes. It just kept moving in a little squiggly direction, no big changes. But it was that one little drop that you see on the chart.
There’s a big bank and they actually came out and said, well, we had a loss, and you go, well, wait a minute. Yeah. On the chart, you see that it’s a squiggly line. And then it shoots up, you know, it’s, it’s basically a vertical line shooting straight up. And then it’s doing the squiggly line thing at a different level, at a much higher level from that point on. So this chart’s going from left to right. And you know, in time, right. And you can say, well, what happened here? They lost money. Why did it jump up so significantly? Well, the reason was because they lost less money than what was expected. And that was new news. When the losses were less than what were expected, it went on at a much higher level.
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The Future May Turn Out Completely Different Than You Expect
Now, when we look at markets with elections, you know, my friend actually told a story about this. He said that a broker was telling me which stocks to buy. And you know, this one guy calls me up and he says, he said, you know, this is around the election. And he goes, well, I got the stock. And I think you ought to buy it. And he goes, well, you know, it’s right around election time. I don’t really want to buy this. And he goes, no, no, no, no, it doesn’t. It doesn’t matter whether Republican or Democrat, it doesn’t matter who wins the election. This thing’s going to go straight up. And it was, as I recall, he said it was selling for $8 a share and he put a significant amount of money into it.
And it went down to two when the election occurred. Why? Because you didn’t have a Democrat or a Republican, there was no result. So, you know, it’s just funny how things like that. You just go, okay, all right. You know, you don’t know the future. And you know, the future may turn out in a way that’s completely different than you expect, you think either A or B is going to happen and then all of a sudden C shows up and that wasn’t even in the mix, it wasn’t even on the radar screen. And that is so often how things I’m just saying. I noticed in my thirty years of doing this, how so often, what moves the market and what causes markets to actually change direction and, you know, big things to happen in the stock market.
And as I’ve said, they happened very, very rapidly. You may have heard me say this before, but it’s just a, it’s like 2.3 days trading days in any given year, giving us 96% of the returns dating back to the 1960s. It was just unfathomable that much of the return of the stock market occurs in such a short period of time. So you go back and you say, well, okay. So when news comes out, you know, what type of news events are going to really, I have just not moved 1% in the market or a 2% move up or down, but what’s going to move it a lot. And because if two days in a given year typically give us all the returns in the stock market historically, then, you know, what news events had to have happened for those big moves to have occurred.
And you would have to answer that it would be, it had to be something big. It would have to be something unexpected because when you have a couple of expectations, things that happen that don’t move anything doesn’t change anything. It’s the unexpected stuff that really moves. And you better be there when the upside happens. Hey, wish it could be not there when the downside happens. But you know, the reality of it is you take both because upside happens more than downside does, you know? So it’s, it’s just mind boggling. Yeah. When you look at it from that perspective, you’ll have something that’s just completely out of the blue and, you know, and could be bad.
It could be, you know, 9/11. And, you know, all of a sudden airplanes crashed into a couple of buildings in downtown Manhattan, or it could be something really good. All of a sudden, you know, a stimulus bill that was, is completely unexpected. And typically not even bills because a lot of times those bills are either expected or have a high probability of passing. But it’s typically something that comes out of the blue, even different than that, that causes big upside. You know, maybe it’s news that Whoa, wait a minute. You know, consumer confidence was way the heck higher. And we thought it was going to be, or, you know, maybe something comes out that says, Oh my goodness. You know, companies buying inventories and buying things for raw materials or products that they’re making or whatever skyrocketed or something that shows that, there’s a new piece of legislation that came out or maybe unilaterally the President goes and makes a change in some kind of a tax strategy or a tariff strategy or something that’s positive.
And then it’s bam just like that. All of a sudden that news gets digested and markets go up. And if you’re not there before it happens, that’s too late. Now you have nothing that you can do. You know? So hence markets are incredibly difficult to predict. And hence, that is why professional managers can’t seem to do it. You know, they can’t do it because they don’t know anything more than any of the rest of us as to what the really big, really unexpected things are. They can dance, they can know things about the companies. You know, they can know a little bit about the cash flow of the company or their sales projections or things like that, but they can’t know the unknowable things.
Acting on What You Know Doesn’t Always Work
And that’s where the difference really comes in as far as where markets move. And so what they’ll do is they’ll try to act on what they do know. And the problem is that they only have one little piece of the pie. We may have a couple things in our minds that are finite. We may be focusing on five or six things, and you’ve got a really smart person and they’re focusing on ten different variables and trying to figure out how those ten different variables are going to actually cause stocks to move or a stock that they’re following to move. But the issue is that you’ll have thousands of variables that actually cause those stocks to move.
And many of them are unknowable until they become news. Now, if you know the news before it actually comes out and you act on it now you’ve got an insider trading thing and you know, that’s an illegal, that’s a legal issue is what you’re dealing with. But the reality is, and people say, well, you know, I worked for the company. I know a lot about the company. Well, you know, so what you work for the company, and you may know a lot about the company, but you don’t know more than the CEO and the CEOs of the company don’t even know where their stock is moving. When it’s going to go, how it’s going to go, you know, what the moves are going to be. And they may have a little bit of information that is completely private.
Nobody knows. But again, if they act on it, the SEC actually looks at trades when they make a major announcement, they’ll look at, Hey, did anybody who’s had any unusual trading in the stock before that major announcement? And they don’t want to go to jail, you know? So they’re going to be really, really careful on doing anything trading wise with their stock just before a major announcement is made. You know? So that’s the reason for that is I think about why, why are they, why is the SEC so adamant that this be the case? Well, they don’t want to have people lose faith and trust in public markets because that’s a bigger problem.
Now, if all of a sudden people lose faith, then, then people won’t invest, right? Well, if people want to invest, then there’s no capital available for companies to operate. If no capital for companies to operate, then companies cease to operate. And then you have a high unemployment because companies have to lay off people and companies go out of business and it’s just not worth it to let some CEO get rich off of their own stock, you know, to have all those negative consequences. So that’s really why the rules are in place. It’s a confidence thing. And that’s the beauty of it because I don’t have to worry about it. I don’t have to worry whether I know more than everybody else, because I realized that all knowable and predictable information is built into stock prices.
And what’s the evidence of that. Well, if you’ve got 92%, 93%, the most recent SPIVA numbers, then they have SPI VA, for those of you that wonder what that is, what that is. And, you know, they have this website where you can actually go and look at how the active managers did versus the markets that they were investing in. And it’s like 92%, 93% of large company managers fail to match market returns. It’s 97% of small company managers that failed to match market returns the past 15 years. And it’s pretty abysmal. You know, the numbers on it are really, it’s kind of embarrassing. I wouldn’t want to be that active manager trying to pull this off.
And, you know, a lot of people think, well, Nepali just index the portfolio. Well, I often have to explain that. No, not necessarily, because you’re typically, you’re, overweighting really big, bigger companies and you have lower expected returns with bigger companies.
Variables Are Built into Stock Prices
Yeah. But you know, large US stock indexing works well in large international markets. It works fairly well, but in small doesn’t work that well in value; it doesn’t work that well in international, small international, a small value in large international value. And you know, a lot of asset categories, most of the asset categories, in fact that I would own in an investment portfolio, it doesn’t work that well. So those of you that wonder about that, because I’ve had that happen so many times people say, well, they just say that this is what you’re doing. You know, you wouldn’t expect that, that the investment industry would get what we do. Right. But nothing new there. So, you know, the election just to put this all in perspective, well, you know, as time goes on and we’ll talk more about it, but you know, the reality of it is, is that the results of the election as we approached it, what might happen has been built in, and what might happen going forward is constantly being built in to stock prices.
And it is futile to try to make trades based on what you think is going to happen, because you may be right, or you may be wrong. But the reality of it is that markets will adjust regardless of who wins. Who’s in charge. And you know, my head, I might have some more as time goes on. I’ll tell some more stories that actually back that up, because I can make some really interesting points about comments, about company owners that I know and what their plans are based on how things turn out with the election. You are listening to The Investor Coaching Show. I’m Paul Winkler.
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