There is nothing on the market as reliable as wheels

There are very few hard and fast rules in the market.

Nothing works all the time.

The world’s largest investors can go through multi-year periods of underperformance. The world’s dumbest investors can go through multi-year outperformance.

These things happen because people rule the financial markets and people can be unpredictable at times.

In my opinion, there are only two constants in the market: risk and cycles.

There has to be risk because without it there would be no reward.

And nothing is more reliable than cycles because market psychology, fundamentals, risk appetite and investor sentiment are constantly changing. Strategies, asset classes and securities go out of style partly because the pendulum is always swinging back and forth between fear and greed, but also because the future is unknown.

For most of the 2010s, it felt like tech stocks were untouchable. They grew like crazy. Everyone used their products daily. The performance of many of these companies fell off the charts.

Then Covid hit and it seemed like the rich just got richer.

The pandemic accelerated the adoption of the technology, and it seemed as if these companies could never lose again. They would only get bigger and more powerful.

And yet most of the behemoth tech names, Apple aside, have been crushed:

Trillions of dollars in market value have evaporated from these stocks. Nothing fails like success in the stock market.

All that was needed was the highest inflation in 40 years and rapidly rising interest rates.

The most difficult thing is that no one could have predicted what the reason was. It’s easy to get lost in magazine indicators like these from 2019:

It seemed then that inflation was dead! The Fed kept interest rates at 0% for over 6 years, and we didn’t even get a whiff of inflation in the 2010s.

All it took was a pandemic, a global supply chain collapse, and trillions of dollars in spending by governments around the world.

But that’s the way it is with cycles – predicting system change in advance requires proper timing and reasoning. No one predicted the worst pandemic since 1918 in 2019, but it changed everything.

One of the reasons cycles are so hard to predict is that people in finance love to herald the death of things. The most famous example is The death of stocks BusinessWeek cover story in 1979.

Ironically, at the time, inflation was the stock market’s biggest problem. Inflation has been dormant for much of this century just like stocks were in the 1970s. See how everything comes full circle?

This magazine cover didn’t exactly hit the bottom of the stock market, as there were two major corrections in the early 1980s, but it was pretty close. The next two decades will bring one of the greatest bull markets of all time.

There is a big difference between death and rest.

For years, investors and pundits predicted the death of the 60/40 portfolio:

The 60/40 portfolio was out of use for over a decade. Then this year happened, which has been one of the worst years ever for the 60/40 portfolio.

Does this mean these people were right all along and only early on? Or do they just not understand how cyclical investment strategies are?

Trust me, the 60/40 portfolio is not dead because it had one bad year. This is not how it works.¹

This same thinking has been applied in recent years to the 4 percent rule for portfolio depreciation because bond yields were so low.

Guess what?

Bond yields are now somewhere between 4-6 percent. The 4% rule is back from the dead.

Or maybe it was never dead in the first place and this stuff is just cyclical.

Listen, markets change and evolve over time. Investment strategies that worked in the past can become obsolete when the smart money discovers them. Size is the enemy of performance.

The thing is, no single strategy will work forever.

Trees don’t grow to the sky. A terrible company can make a great investment at the right price, while a great company can make a terrible investment at the wrong price.

Investors go back and forth between fear and greed, speculation and conservatism, and patience and panic.

In 2021, Robinhood’s trading platform went down because too many people were speculating on meme stocks.

In 2022, the Treasury Direct website crashed because too many people tried to buy Series I savings bonds.

Markets are always and forever cyclical. The problem is that it is basically impossible to predict the timing and rationale for the end of old cycles and the beginning of new ones.

Michael and I discuss 60/40 portfolios, the 4% rule, inflation and more in this week’s Animal Spirits video:



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Further reading:
Financial news does not rhyme, but repeats itself

Here’s what I’ve been reading lately:

¹Also, declaring the 60/40 portfolio dead is like saying diversification is dead.