Winners and Losers Two Years After COVID Market Meltdown

Paul Winkler: Welcome. This is “The Investor Coaching Show.”

I’m Paul Winkler.

Coaching investors, teaching about investing markets, how they work, because it is the investor that has knowledge about how markets work, where returns come from—and just is aware of what’s going on around them, and what they’re doing, and why they’re doing it, and what to expect and all that—well, those are the ones that end up being successful, as I often talk about.

If I know, especially, what to expect, that is a huge, huge issue for investors. Anytime you go into something going, “I don’t know what to expect”—

But let’s say if you walk in really optimistic, and you go, “I think this is going to be just wonderful!”

And I often use the example of marriage: “It’s just going to be bliss every day.” And then all of a sudden you actually get into the marriage, and it’s not bliss every day.

It’s a wake up call. And then you end up disgruntled and unhappy.

You go into a job. “I think it’s going to be the best job ever.”

And then all of a sudden you have a bad day, and you’re like, “Ah, man, I can’t wait to get out of here.”

Teaching Investors What to Expect

So optimism has its place, but being realistic and realizing that things are not always going to go well, that’s a really important part of it.

But Wall Street sells us on the idea of everything’s going to be great.

“We’ve got this manager, and this manager has a great track record.

“They’re really, really great at telling us where markets are going to go next and what’s going to happen next. And you ought to invest with us.”

Well, it sells people, but the problem is it doesn’t keep them around.

And I’ve always been of the opinion, be honest with people—you just tell them the stinking truth.

You tell them the stinking truth, and you know what? You might have an investor for life.

But you lie to them and tell them that it’s going to be great, and it’s going to be always wonderful, and we have these great abilities that you just simply don’t have, then guess what? You’re not going to have a customer for life.

And that, I think, is just the key to success that the investment industry, if they’d ever figure it out, they might have something on their hands.

But what they do is same stuff, different day, all over the place. And the media is really good at this, really shaking people up.

A Two-Year Anniversary

But that brings me to this topic because this past week we actually hit an anniversary. Anybody know what that anniversary was?

Well, if you’re out there, and you’re yelling at this screen that it was the two-year anniversary—or if you’re not watching on a screen, because this is actually, we got the video and the audio going here.

If you’re listening, you might go that it’s, oh, the two-year anniversary of the bottom of the downturn at COVID. Right?

We were doing workshops, and we were doing—I remember bringing in my whole staff. And we had this new room that we were actually going to be doing all of our radio shows in.

And I brought everybody in. And we sort of socially distanced.

We weren’t really that great at socially distancing. We really didn’t.

We just didn’t do much of it.

I was in one room, and everybody else, they’re all kind of spread out in other areas because we didn’t really have the setup to have everybody all separated from each other.

But we had these conversations about, “What’s going on? What do we need to think about this?”

“How are things going? What are happening in markets?”

And it was a scary time for a lot of investors.

That one little statistic that we had seen back then, March of 2020, was something like 30% of investors—and they had various age brackets, like 55 and 60 and 65—had pulled their money out of stocks completely during that period of time.

And just hearing all of the terrible things that were going to happen, how everything was going to close down, who could blame people for getting scared?

Market Performance Since the COVID Low

Now, that is exactly what MarketWatch actually talked about was this. They had this article, and it was “The Stock Market Hit Its COVID Low Two Years Ago Today. Here’s How Its Performance … Stacks Up.”

“It’s the second anniversary”—and this is this past Wednesday—”of the low set in the U.S. stock-market plunge triggered by the … COVID-19 pandemic … 2020.

“Stocks have stumbled … in 2022.”

Some areas are actually up, so actually I would disagree with that. There are areas that are actually up, but a lot of people don’t own them because they’re are areas that wouldn’t be on a radar screen for an American investor.

And it says, “Rising”—

But here’s basically what happened. Even though they had the—and this is the only thing, the media only looks at the S&P 500.

Let’s face it. It’s like nothing else exists for them.

But we’re just going to go with it.

S&P 500 actually has risen 101% from that close back two years ago.

And it’s true. You had a 100% return.

That’s huge, if you think about that.

Now I went and looked at the data just to go, “Okay, what other areas?” Because if you’re diversified, you shouldn’t just have everything in the S&P 500.

Small U.S. value stocks, get this: 169% two-year return.

Micro-cap stocks up almost 140%.

Small caps: 133%. Large-value stocks: over 110%.

International large-value, it was 111%.

And so you look at that and go, well, the U.S. large, which is what everybody focuses on, is one of the lower performing areas over that whole time.

Helping Investors Stay on Course

So I started thinking about this, people bailing out, and what we were doing to try to help investors not do this.

Because a lot of times when markets are down, that’s when I get people: “Paul, what do you think is really going to happen this time?”

And some people just lose faith altogether, and they just get mad at me, like I’m in charge of the markets or something like that.

But especially when I do a video that’s optimistic. It’s just like, I remember somebody calling me “Paulie-anna.”

“Yeah, you’re just ‘Paulie-anna!’”

And I just go, “Come on. Really?”

No, this is what I’m supposed to do. It’s making sure that you don’t go shoot yourself in the foot when markets are down.

So what I did is I looked back at my archives, my video archives on my website.

And you can actually go back there and look at this yourself. It’s paulwinkler.com.

And you go through the videos, and you can actually tool through and look at past videos that I’ve done. And you have to go back a lot of videos to find back in March of 2020.

But the one workshop that I had done, which ended up being, like, really, really popular—there was something I think on Facebook that had 60–70,000 views of it, but it was the workshop tool for downturns.

And it was about how: ”Oh my goodness, I’m too old for this. I don’t have time to recover from a stock-market downturn.”

And “This is just too much. I just got to go on the sidelines.”

“I can’t do this anymore.” And there were people that were saying that.

And what I did is I did a video on that. And I had people that would come and go, “Oh, Paul, I’m just—”

Luckily, not our clients. People ask me all the time, “Are your clients panicking?”

And I’ll say, “No.”

You educate them really, really well, and they don’t panic when what they know will likely happen or expect to happen—because I basically prime them for it when it happens. It’s not this big shock.

And so what are we doing? Are we making any changes?

Yeah, we’re always making changes. We’re rebalancing portfolios in the U.S. on a daily basis for our clients.

And we’re rebalancing quarterly down between international, U.S., and fixed income, and there’s constantly stuff going on.

But panicking, no, that’s not what’s going on.

There’s Always Something Affecting the Market

So what happened is that I did this video.

And I’m walking through: “It’s different this time. Man, this is terrible. It’s awful.”

And I said, “Well, when we went through the Depression, it was different. We had never been—as an investor, you’ve probably never seen something like that before if you were an investor in the late ‘20s, early ‘30s.”

If you were in the late ‘30s, or let’s go late ‘20s, first of all, we look at that in the Depression and it was—the Roaring ‘20s were phenomenal.

So an investor that had been investing during the Roaring ‘20s, or when the ‘30s came along, and they heard what was happening regarding—the Fed was screwing up.

You had tariffs that were increased as a result of it to try to protect—they called it protectionism—protect the country, so that we could make sure that we kept the jobs here.

And then we had deflation, prices going down.

But we didn’t have a Congress that had the will to let companies actually reduce the pay of people because, “Hey, if we reduce the pay, that’s not good. People don’t like to see their paychecks go down.”

When in reality, because of deflation, their paychecks had greater purchasing power. So they really wouldn’t have been hurt by it.

But literally our legislators were saying, “Hey, let’s do this. Let’s make sure that they don’t reduce the people’s paychecks because they’ll get mad at us in Congress.

“And let’s make sure that we have these controls in place.”

And that, of course, made things even worse because that’s what Washington often does: make stuff worse.

And then we have the late 1930s. We get into World War II.

“I’ve never been in something like—we had World War I, but this World War II, I mean, we got technologies that are really, really devastating now. And wow, this is really, really bad.”

And then you have the Cuban Missile Crisis. We have, literally, nukes right off our shores in Florida.

And you’ve got the ‘70s oil crisis. We don’t have the oil and all of that, all this stuff.

And it’s always something different is my point.

Half Empty or Half Full?

So I did this workshop talking about “too old for downturns.”

And I literally put that workshop out—remember, March 23 was the market low—I actually did that workshop and published it on March 20, literally three days before.

Then I did another video a couple days later. Because it’s not enough to do a long video.

Some people just won’t watch the longer video. So I’ll do little short videos as well on my website.

And I did one called “Half Empty or Half Full.”

And it was this thing I was talking about. Marc Short, this guy, it was talking about statistics, about treatment plans, and that there were promising treatment plans out there.

I was looking for anything I could to help people realize that the world wasn’t ending, that there may be some promising things on the horizon.

And I went back and watched the video. And one of the things that I actually talked about—

There’s something I talk about quite frequently when you have market downturns, which is, I will tell people, I look at the price of stocks compared to the book values, that are assets minus liabilities.

And what I mentioned in that particular video is I said I’d never seen prices this low. You had some areas of the market selling for 50 cents on the dollar price to book.

And the point I was trying to make was that, could it go lower? And I did say this.

I said, “Could it go lower? I guess it can.

“You never know how low people are willing to sell their stocks for. But it’s pretty stinking low.”

And I said, “Small-value U.S. stocks selling for 70 cents on the dollar,” is what I said in the video.

And that was the area that since then is up almost 170%. And I published that video on March 22.

Well, remember March 23 was the market low.

And we were kidding about that in the office here. It’s like, whoa, that’s pretty forward looking.

I have no clue. I had no clue that it was going to be the market bottom.

No way of knowing that, but that is how I looked at things. I always look for, especially when people get really, really pessimistic, I’m looking for something positive.

And the reason is because typically that’s being completely ignored.

Why Do We Ignore Positive News?

We have a part of our brain, the inner part of our brain, that is the fear center: the amygdala. And that actually goes into hyperdrive when things become threatening.

And when that becomes engaged, a lot of times what happens, the frontal lobe of our brain— which is the conscious, cognitive, rational thought process machine in our brain—shuts down. And it’s overridden because we’re in survival mode.

And, for an investor, that is really dangerous when you’re in that survival mode because that’s when you take action that ends up really hurting you, long run.

And that’s exactly what a lot of people did. They went and took action, and it was the wrong action based on these numbers.

So, this is why I slow down and go, “Okay, I get it. It’s scary.”

And when you do that with somebody—“I get it. It’s scary”—what that has a tendency to do is it tends to calm down that part of your mind that is in survival mode.

And then it allows them to re-engage the part of their brain that is logic-driven, rational, and the thought processes become, “Okay. I knew this could happen, and I get it.”

“It makes sense. Oh wow, 50 cents on the dollar. Okay. Yeah. Maybe I don’t need do anything right now. Maybe I just go…”

If it helps, don’t look at those statements during those periods of time.

And then just take a deep breath, go out, walk in the grass or something in your yard and just go, you know what? This too shall pass.

And that’s basically what I said.

There are people that are “glass half full.” There are people that are “glass half empty.”

And history shows us that the “glass half empty” people usually end up being wrong. Because as humans we find a way forward.

We find a way to solve the problems we have and come out on the other side, better, stronger, and hopefully more resilient.

And that’s exactly what happened two years ago, this past Wednesday.

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*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.

Historical Performance of Indices

Advisory fees charged to Paul Winkler Inc. (PWI) clients, whether directly or indirectly through a mutual fund, are described in PWI and Matson Money’s Form ADV Part 2A. Past performance is no guarantee of future results. Portfolios cited are PWI 60/40 diversified and 95/5% stock v. bond portfolios. 

This Presentation includes historical performance information from various global stock market indices. Market performance information is included in this presentation solely to demonstrate the potential benefits historically associated with diversification of asset classes and does not represent or suggest results PWI would or may have achieved when managing client portfolios. Investors cannot invest in a market index directly, and the performance of an index does not represent any actual transactions. 

Historical stock market information is derived from returns software created by Dimensional Fund Advisors LP (DFA). DFA is a registered investment adviser that, among other things, specializes in and sells statistical market research and mutual fund management. DFA obtains some of its market data from the Center for Research & Security Pricing (CRSP), part of the University of Chicago’s Booth School of Business (Chicago Booth).

Backtested Historical Performance

This Presentation includes historical performance information from various global stock markets and registered open-end investment companies or “mutual funds”. Some slides describe hypothetical portfolios that are derived from various market indices described more fully in the References to Indices section of the endnotes.

Why Does PWI Utilize Hypothetical Backtested Performance? 

Slides that depict hypothetical backtested performance are used by PWI for pedagogical or educational purposes only and are intended only to demonstrate how the market (or various segments of the market) has historically behaved as well as the benefits of diversification. PWI also seeks to educate investors on the general strategy of focusing on capturing market returns, utilizing various asset classes to remain broadly diversified, and highlighting the benefits of eliminating stock picking, track record investing, and market timing. In some cases, PWI may utilize backtested historical performance to depict what the firm feels investors should seek to avoid (namely, stock picking, track record investing, and market timing). PWI does not configure, alter, or otherwise use hypothetical back-tested model portfolios in an attempt to artificially enhance or impair performance, does not link hypothetical performance with actual performance, and attempts to apply the hypothetical data based on objective criteria consistently applied throughout the presentation.

Limitations of Backtested Historical Performance. 

PWI did not begin managing client funds until 1999 and any hypothetical portfolios utilized in this presentation (whether prior to this period or after this period) are not intended to and does not reflect the performance of actual account managed by PWI and do not represent any PWI-managed client portfolios. Back-tested performance has inherent limitations, including, but not limited to:

Each hypothetical portfolio or sample asset class mix shown was designed recently with the benefit of hindsight after the performance of the markets during the relevant time period was already known. Backtested historical performance do not show the results of actual trading by PWI of clients’ assets, nor are the returns indicative of PWI’s skill in managing a client’s account. No inference is made that clients would have had the same or similar performance results if PWI managed their assets for any part of this period. Because back-tested performance does not represent actual trading in client accounts, it may not reflect material economic and market factors, as well as the impact of cash flows, liquidity constraints, investment guidelines or restrictions and fees and expenses that would apply to actual trading. 

Most presentations that utilize backtested historical performance will be used to educate investors on the general strategy of focusing on capturing market returns, utilizing various asset classes to remain broadly diversified, and highlighting the benefits of eliminating stock picking, track record investing, and market timing. This general strategy was available during most time periods, however, certain asset classes may not have been easily accessible by the average investor. Index funds were not available until the 1970s and access remained limited to retail investors until the 1990s.

Backtested results presented here assume that asset allocations would not change over time or in response to market conditions, which might have occurred in the case of actual account management. PWI asset allocations strategies have not changed significantly since the firm was created in 1999, however, there has been some updates as additional economic research becomes available, and new investment products make investing in certain segments of the market possible.

The annual return information of the hypothetical portfolios assumes the reinvestment of dividends, but does not include the deduction of fees or expenses which would reduce returns. Hypothetical or sample portfolio returns generally exceed the results of client portfolios managed by PWI due to several factors, including the fact that actual portfolio allocations differed from the allocations represented by the market indices used to create the hypothetical portfolios over the time periods shown, new research was applied at different times to the relevant indices, and index performance does not reflect the deduction of any fees and expenses.

Both the backtested hypothetical portfolios and PWI’s own asset allocation formulas may change as additional economic research becomes available, and new investment products make investing in certain segments of the market become available.

Hypothetical allocations do not include fees. Although the hypothetical portfolios are not intended in any way to be viewed as model performance of PWI, you should understand that actual client portfolios are subject to the deduction of various fees and expenses which would lower returns. For example, if a 2.0% advisory fee was deducted quarterly (0.5% each quarter) and your annual return happened to be 10.00% (approximately 2.0% each quarter) before deduction of advisory fees, the deduction of advisory fees would result in an annual return of approximately 8.0%, due, in part, to the compound effect of such fees. Advisory fees charged to PWI clients, whether directly or indirectly through a mutual fund, are described in PWI’s Form ADV Part 2A. 

It is possible that the markets will perform better or worse than shown in the hypothetical backtested model, and that the actual results of an investor who invests in the manner PWI recommends may lose money.