Are You Smarter Than Albert Einstein?

Join Chris Perras for the 12/4/2020 episode of Stock Talk!

Chris: Good morning, I’m Chris Perras, chief investment officer at Oak Harvest Financial Group in Houston, Texas. Welcome to our weekly Stock Talk podcast: Keeping you connected to your money. I’m going to follow up last week’s podcast with another “Buy the Dips”, part four. This one’s entitled, “Are You Smarter Than Albert Einstein?” Earlier this week, I was talking to a friend of mine who, while he was managing other people’s money in the 1990s, was probably the top broke investor running a large mutual fund in the United States. His name is Scott Schoelzel. He took the Janus Twenty Fund from around 4 billion in assets to over $25 billion in assets over 10 years before turning in the keys and retiring a few months before the internet bubble peaked in late 1999, early 2000. I still consider this the second-best market timing call of that period right behind Mark Cuban selling broadcast.com to Yahoo for over $5 billion and then hedging his entire Yahoo stock holdings, which at the time was well over $1 billion in front of the internet collapse over the next two years. That internet collapse, remember folks, it took Amazon, yes, the number one internet company in the world, it took their stock down over 95%. Down 95%.

We’re talking about long-term gross stock investing, and we were talking about letting your winners round in compound. He reminded me that it was Albert Einstein who said, “Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it.” Regardless of whether Albert Einstein uttered those exact words or not, the truth of his statement is ridiculously powerful and can’t be questioned. For anyone who wants to build lasting wealth, understanding and harnessing the power of compound interest is essential. What is compound interest? Well, it’s the exponential increase in the value of the investment. Simply, it is the interest you earn on your interest. It’s the return on your returns. It is letting your money make more money by being patient over longer time periods. The key requirement for generating compound interest is what? Well, it’s time. The longer you leave your money to grow, the more pronounced and positive the outcome.

With today’s society, and it’s always on 24 hour a day, seven days a week real time everything, including opinions, which are masking as news, many investors are encouraged to expect immediate rewards and returns. For many, being told it will take a few years to see good returns on their investments is not what they want to hear. However, while we are bombarded on financial news channels by short-term opinions and hedge fund trading strategies, wealth is rarely created by trading short-term. It might make us feel better, but rarely do we do enough as investors to add value or move the proverbial needle. The successful hedge fund billion on TV or options traders quoting easy lower risk strategies are the exception, not the rule to wealth creation, and honestly, more often than not, these individuals got wealthy through their businesses, not through trading short-term. They got wealthy through the businesses of managing other people’s money first, or selling newsletter subscriptions based on their opinions, then by managing their own money that they’d saved, secondly.

With the turbulent year of 2020 coming to a close, I wanted to remind my listeners that stocks, while we can now trade them almost non-stop, five days a week, free of charge nonetheless, are long-term assets for the majority of investors. We all make mistakes, but as investors we need to try as best we can to let time compound our investments. We need to let time mature them and compound in their favor.

This week on the back of surprising timing for additional COVID stimulus bill from congress we experienced an unusually strong, post-Thanksgiving start to December. At the beginning of this week they got and S&P 500 to where it now sits at around 3655. This week’s move up is little earlier than normal with it most likely being caused by a short squeeze in traders positions who were positioned for a normal down first week in December. The first week of December is normally a little weak and noisy. This year, it’s been noisy and choppy, but a bit stronger than expected. We expect much of the short-term market noise to be passing as early as next week, and the market to begin six to eight weeks of what I like to refer to as “lurch and grind”. We may remain very positive on the next few months as well as all of 2021.

Let me recap a few of the reasons that I believe many of those who waited out all of 2020 for the skies to clear are now stuck in “buy the dip” mode. Those dips, at least through January, shouldn’t be as big a percentage as any of them really want. I can’t count how many times over my 25 years I’ve heard someone tell me, “I want to buy things 8% to 10% lower,” then move down in the market happens like it did this past September into the election, and investors get frozen by some new news item and they don’t buy. Well, listeners, the market then tends to rally and push stocks to higher levels. Part of the clouds clear and those same investors say to me, “I want to buy the market 5% to 8% lower.” Unfortunately, volatility is dropping, so the market never drops the percent they want. Ultimately, they throw in the towel and they buy stocks while they’re making new all-time highs.

Given the fund flow data which is starting to show large inflows into the market post-election, we are now probably in “buy the dip” lane where the dips are only 2% to 3% into early to mid first quarter of 2021. Why? First, monetary stimulus by the central banks, as we’ve talked about, throughout the world has exploded, and it’s being led by the federal reserve. Domestically, the federal reserve has committed to an additional $120 billion in securities buying per month through 2021. We’ve discussed this at least 5 to 10 times in podcasts. Additionally, by August 1st, 2021, cash held at the treasury will need to be lowered to $200 billion based on an agreement of the 2019 debt ceiling. What that means is that with treasury cash currently sitting at $1.5 trillion, the difference, which is $1.3 trillion, will be flooded back into the banking system in increase in liquidity over the next eight months. That’s more than doubling the liquidity in the system. When you add the fed and the treasury together, you’re talking about $2 trillion in additional money that could find it’s way into the financial markets over the next six to nine months.

Second point, COVID fiscal stimulus round two is coming, as we talk about the past couple of months. When? I don’t know. How much? Looks like $1 trillion in this next round is a good guess. What will it do? It’ll help the economy in the financial markets. Third point, unlike most other financial opinions, I think volatility will collapse in 2021. “Well Chris, define collapse. What does collapse mean?” After a possible short-term uptick in volatility after first-quarter earnings, I think over the next 15 months spot volatility could go back to 12 to 12 1/2, and possibly under 10, much the way it did in 2017. Why? The federal reserve has taken control of volatility by way of easy monetary policy, and with Janet Yellen at the helm as treasury secretary, and Jerome Powell in place at the federal reserve, I think that’s a match made in heaven for volatility collapsing over the next 15 months.

Moreover, no one has yet sensibly explained to me why except for presidential tweets and policies since February 2018 when the Trump Tax Plan was passed, the S&P 500 has traded at a volatility level 50% to 100% higher than Chinese stock markets, when prior to February 2018 and the China tariffs and tweet storms, we used to trade at a 50% discount to the Chinese stock market, in terms of volatility. As of today, the Chinese stock markets are trading at a volatility level of 19, and a half of 19 is under 10. That would be under 10 VIX. I think President Trump’s nickname of Biden, of “Sleepy Joe”, while it’s immature and childish, does foreshadow what is likely to transpire in financial markets the second half of 2021. I do not expect this to happen in the next month or two but it can happen throughout the second half of 2021.

Fourth thing, positive money flows into the market. Late or not, like it or not, in good years in the market like this year, many institutions get year in money flows. Retail investors feel emboldened. What do they do? They buy stocks. What do they buy? Do they go searching for new ideas in December or in January? No, they usually buy more of what they own or the leaders of the past year. Defund managers let the cash build up on their balance sheets and sit idly by. No, almost never, every index fund manager buys exactly what they already own regardless of price. Price is irrelevant to them, both ways. Money flow comes in, like on a payday when money flows from your paychecks, directly to your 401(k) plan or on Monday after people have read about how good stocks were doing. What do fund managers do, what do they buy? They buy every day. They buy every day they get positive money flow, and they do it regardless of the stock prices. It happened in the fourth quarter of 2012 through 2013 post-election, and it happened again the fourth quarter of 2016 post-election through the first quarter of 2018. This cycle, positive money flows into the market while late in receiving the best percent returns still drive equity prices higher.

Fifth point. After pausing in the first quarter of 2021, the economic reopen acceleration should gain momentum through 2021. That’s good for 2021 earnings in the market, and that’s good for equities. It’s bad for bonds but good for stocks. Listeners, there are no guarantees in investing more in the stock market. Except for three horribly volatile down weeks in March, 2020 was far from unprecedented in the stock markets. After this year, I wish they would blacklist that word from our lexicon. It says overused and untrue is the new normal phrase being thrown around now, for what, the last 10 years?The market’s behavior has been consistent with prior election years and damned near precise in its behavior, mimicking expansion phases since this cycle began after the great financial crisis in 2008 and 2009. Many doubters remain, they are still waiting for the skies to clear perfectly. This is hundreds of billions, if not trillions in potential investment dollars that, much like 2012 or 2016, found their way back into the markets over the next 15 months in 2013 and 2017. We are in a bull market, those who keep saying things are uncertain, it’s not time to be aggressive, while they will not be losing their client’s money, will most likely be proven to have missed the best opportunities in 2020. Each election periods since the great financial crisis in 2008 and 2009 have shown similar patterns and stocks into and out of each election, and the markets and economy showed similar responses post-election. This is how bull markets look.

At Oak Harvest, we are comprehensive long-term financial planners. What this means is that as our client, you and your financial advisor should have a financial plan that is independent of the volatility of the stock markets. Give us a call at 281-822-1350. Our financial advisors are here to help you plan on your financial journey throughout retirement through a customized retirement planning. Many blessings and have a great weekend.

Announcer: The preceding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created. For any cited data statistics and sources are not guaranteed. Content, ideas, and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Investing involves the risk of loss, and past performance does not guarantee future results.