Staying The Game
If you are reading this, chances are your public markets (& recently listed hyper-valued late stage cos) portfolio has sunk by a minimum of 20% on the quarter, going up to what I hope is not an irreversible loss. To not act is, however the point !
The Federal Reserve is expected to start raising rates next month and not slow down until well into 2023. Only twice before in modern history (early 1975 and mid 1980s has the Fed allow the real funds rate to plunge to -5% (We're at -7% as you read). Those two instances marked what you know as the Great Inflation (CPI rose by ~ 8.6% average annually). We're only getting started !
For example, in the aftermath of the dot-com bubble the Fed under Alan Greenspan ran a negative real funds rate averaging -1.1% for 31 consecutive months.?Previous Fed chairs Ben Bernanke and Janet Yellen averaged a -1.9% average real funds rate on a 62 month streak. Post crisis, Yellen along with Jerome Powell held the rate at -0.9% for 37 months. The result ? Inflation & a rapidly sinking wallet.
Yet today we walk on a bed of hot coals, naked ! The -3.1% real federal funds rate of is twice the -1.4% average of those three earlier periods. Despite this, both the hyper funding cycle & consumer spending have not only recovered but continue propelling through the roof. (FYI : The last business cycle spanning more 10 years following the 2008 Financial Crisis never saw consumer spending reclaim its pre-crisis level). The console is on 140 beats-per-minute, but the DJ just left the party !
This is a vicious cycle to get out of until you know one of two things - spending lesser than usual, or staying the game.
Come to think of it - over the last 20 or so years the S&P 500 produced an average annual return of around 6%. But if you missed the best 20 days in the market over that time span because you became convinced you should sell and then reinvested later, your return would shrink to to 0.1%.
Conversely, missing the worst 20 days in the market over the last 5, 10 or 20 years would expand your returns anywhere between 7-21%
There have been at least 22 geopolitical events over the past 80 years. From the Pearl Harbor attack on December 7, 1941 to the U.S. withdrawal from Afghanistan in August 2021. In between, there was the Cuban missile crisis in 1962, Iraq’s invasion of Kuwait in 1990 and the Boston Marathon bombing in 2013.
On average,
The learning ? Mediocre skills multiplied by extraordinary strength to stay the game. Some of the smartest investors in the room have, without event-triggered flinching, held onto cash for long periods of time on the back of sound global macro signals, thereby benefitting from a capital flight to large, well-established firms after the pandemic at the bottom of the cycle. Whereas fearful venture capitalists have pumped an infinite sum of money into lofty valuations through the night before waking up to massive write-off hangovers at sunrise.
Public markets are science. And science must eventually win !
The only valuation that really matters is the one at the final liquidity event.
Consistent capital deployment carries with itself the burden of an occasional major market decline, even panics. No one can tell you when these traumas will occur. But the greatest moves are usually greeted by yawns and a close foot on fundamentals.
As Morgan Housel says, a few little things that are easy to ignore yet work wonders when combined together during tough times -
Wealth is what you don’t spend,?which makes it invisible and hard to learn about by observing other people’s lives.
None of this is exciting, perhaps even painful. But maybe that’s the point.
Stay the game.