What I’m getting from this board in general and you specifically that I don’t really get directly from TMF is an education about more actively managing a portfolio, with an eye towards the long term even if that long term comes with air quotes and a little wink.
Tim, I don’t think TMF officially wants people to actively manage their portfolios because that’s how the worst mistakes are made: things like selling at the bottom of a bear market, or selling off winners way too soon and giving up life-changing wealth building, etc. David Gardner even wrote an article praising people who keep stocks that go to zero because it demonstrates patience, which can be very important for letting winners run (and remember, you can only lose 100% but you can gain many, many times that with a true winner, so the math is in your favor with that approach).
A few bad mistakes at the wrong time can unravel years worth of great investing decisions and destroy tremendous wealth (imagine the poor people that got into the market in 2007 and then panicked and sold out near the bottom of 2009). So while I don’t think anyone at TMF would tell you that holding a loser to zero is more efficient than shifting that capital into a winner, I think first and foremost they’re trying to prevent wealth-hobbling mistakes that can very easily accompany that kind of active portfolio management.
IMHO, Saul’s approach is advanced. It’s like upgrading from hand tools to power tools: a lot more productive potential, but also a much higher likelihood of serious injury. More than anything else, I think it requires a certain mindset. Someone posted a little up-board about the emotional turmoil they experience during market downturns: that’s extremely dangerous IMHO when mixed with active portfolio management, and I honestly think that person would probably be a lot better following more of a traditional TMF-style strategy of “rarely selling” because that will at least prevent disasterous mistakes at the worst possible times. Is it less efficient? Absolutely, but that extra drag on the portfolio is a drop in the bucket compared to the long-term damage something like selling out at the bottom of a bear market will do.
I think some of us tend to take our emotional mindset for granted, but I’ve come to believe it’s one of the biggest differentiators between success and failure in investing over the long term. One of the most important things any investor can do are (1) honestly get to know themselves and their temperament, and then (2) setup a framework and process, customized to that temperament, that allows them to avoid big mistakes regardless of what the market throws at them (kind of like setting up guards and safeties for those power tools). For example, someone asked Morgan Housel how much cash he keeps on the sidelines, and the answer is a lot: not because he’s convinced the market has peaked and is going to plummet tomorrow, but because he knows that he tends to struggle emotionally with downturns and keeping that cash around is what changes the downturn from a negative event to a positive event in his mind. Whether or not keeping that cash on the side is “optimal” for the average investor is a moot argument (though he has some interesting statistics about it): if that’s what it takes to allow Morgan to react positively to a significant downturn and sleep well at night, then it’s absolutely the right strategy for him. It may or may not be the right strategy for you or for me.
I definitely recommend that everyone take a few moments to consider their honest reactions during the recent market turmoil, keeping in mind that it was a very normal, healthy, mild, and short-lived correction: when a bear market inevitably arises, it will be at least twice as bad by definition (and quite possibly much worse than that) and last on average 21 months. Were you excited by the correction? Were you fearful? Did you roll your eyes at the silliness of it all and walk away? Were you business as usual? Were you reacting with a cool head, or with emotion? And how are you likely to react to a downturn at least twice as bad that potentially lasts a couple of years instead of a couple of weeks? If the answer is “not so well” then you may want to consider thinking about what you can do to turn that inevitable downturn (after all, it’s only a matter of when, not if) into a positive event for you rather than a negative one that potentially leads to suboptimal long-term portfolio decisions. Remember, while we tend to view future downturns as risks, we look at past downturns as wonderful opportunities: you want to figure out how to change the next downturn from risk to opportunity for you in practice.
But avoiding big mistakes during downturns is only half of the battle: you also need to avoid them during the good times. Certainly one of the biggest mistakes is selling off winners too soon (perhaps due to the same nervousness about protecting capital that leads to selling in downturns), hobbling your potential for long-term compounding. Saul very rightly points out that it doesn’t matter how companies you sold are doing as long as you’re happy with the performance of the companies you’ve shifted that capital into. But every time you shift capital from a proven winner into a new company, you risk making a mistake and, worse, getting stuck in that mistake. Saul is very good at shifting capital and has the proper mindset to quickly recognize mistakes, avoid common biases like price anchoring and endowment effects, etc. But each person needs to be honest with themselves about their own mindsets and how vulnerable they are to getting bogged down by mistakes and biases, and then work on building a process that helps avoid them (or at least minimize the impact of them): if you’re selling your winners and holding your losers, the math isn’t helping you anymore.
This is all just my opinion, of course. More than anything, I want to see all of us as a community experience huge long-term success. My recommendation is to keep an open mind, avoid dogma, be humble, and – perhaps most importantly – know thyself.
Finally, for anyone who hasn’t already read Markets Never Forget (But People Do) by Ken Fisher, you should. It will help put these market movements into context, provide a historical understanding of the very natural cycles the market moves in, and will also give you insight into how people (and especially the financial press) tend to portray these events at the time. I have a Kindle copy that I’m happy to loan out (just email me off boards).
Neil