PANIC at the VIX...Oh
PANIC at the VIX...Oh
Remember that catastrophic unwinding of the carry trade? The market doesn't (and other random thoughts).
As I write this, the NASDAQ 100 Futures are pricing in a 1.8% gain from yesterday’s close. If we back up to Friday's close, the NASDAQ 100 is down 0.5%. I’m sure prices will change by the time you read this, but a less than 1% change after all that media attention yesterday sure brings investing into perspective.
I’m not going to explain what happened yesterday. Chances are, if you read this, you read a lot of financial media and news. My knowledge of the yen carry trade came from a couple of Odd Lots podcasts I half-listened to while walking my dogs months ago. I would be regurgitating something you likely already read with limited knowledge of the subject for no other reason than I have a newsletter and should have thoughts on this.
(Is there a term for this? Mansplaining, but for financial stuff? Finsplaining?)
Also, considering the net effect of the whole thing was a 0.5% decline since the week began, how more much time do we need to dedicate to this event?
The event itself wasn’t the critical thing upon which to focus. Instead, here are a few half-baked thoughts I had as I watched yesterday unfold up until now.
Before we go any further, I should preface that everything that I say from here is the view of an individual investor (or retail investor if you want to be a jerk about it) who buys companies, holds them, and lets the business’s earnings power do the heavy lifting. If you were borrowing zero-coupon Japanese bonds while shorting the VIX to juice the returns on momentum trades; then the following doesn’t apply. You do you.
Don’t feel rushed to do anything…ever
If you spent over 30 seconds on social media yesterday, came across both sides of the panic spectrum. The prophets of doom are likely saying this is “the tip of the iceberg” or some other cryptic catchphrase to explain why markets are broken and why we should be stocking up with a Costco survivalist food pallet (or buying their gold or crypto newsletter).
On the other hand, you have the panic buyers. The ones telling you to “load up” on shares of various companies. They’ll use the same hyperbole as the doom prophets, but they will use phrases like “generational opportunity” or “buy when there’s blood in the streets” every time a stock price declines 3% (or buy their investing newsletter).
Ignore both (except this newsletter, of course).
There is immense temptation to do something during fast-moving events. Fast isn’t a direction, though. Few things are as value-destructive for a long-term investor to throw their frameworks out the window to chase a couple of percentage points in the market.
I assure you that “generational opportunities” will come in the future. When they do, those screaming about it today won’t be nearly as loud.
When macro matters
Ask most long-term, buy-and-hold investors, and they will tell you that “macro” should be the eighth word on George Carlin’s list. The idea that macroeconomic factors should penetrate their investment thesis in a company with a massive economic moat is ludicrous to them.
I’m not one of those people. As much as we want to buy companies that are built to grow and weather times of economic uncertainty, we as investors cannot stick our heads in the sand regarding macroeconomic or industry-wide factors.
David Einhorn’s speech at the 2009 Value Investors Conference is a great example of how his focus on bottom-up investing ignored broader macroeconomic factors. It rings especially true for me because I made a similar mistake with Transocean (NYSE: RIG) when the market for offshore rigs collapsed from 2014 to 2020. Sure, it had the best balance sheet and was the least likely of all offshore operators to go bankrupt.
I was right about Transocean being the only one not to go bankrupt, and look what I got as a reward.
Macroeconomic and industry factors matter when it comes to our investing thesis. Interest rates impact everyone’s cost of capital. Anyone with a bank stock or other financial business that subsides on net interest spreads should know how both sides of that equation are constructed. Cyclical companies will wax and wane with the economy. Manufacturing indices, unemployment rates, wage growth, credit default rates, and many other big-picture factors will influence companies to varying degrees. When developing an investment thesis, our job is to determine which factors matter.
I don’t know how many investors have incorporated interest rate spreads between the Bank of Japan and the Federal Reserve into their thesis. I can’t say that has ever been a factor for me. It is probably worth a few minutes to see if narrowing credit spreads between US and foreign Central Banks will impact the business activity of the companies we own. But I can’t say I’m going to lose sleep over it.
Media likes spicy
Tell me if you have heard someone bemoaning that there isn’t enough level-headed and nuanced discussion in the media. (It’s okay to raise your hand if you were that someone). Regardless of whether it’s legacy media, social media, or internet media (I don’t know what else to call YouTube), the discourse has gradually drifted to shorter content morsels where talking heads say some of the most outlandish things. Instead of pushing back or thinking through a topic, the host moves on.
This phenomenon is prevalent across all topics: Financial media, sports media, and political media have all shifted programming and content toward this construct.
It’s not a coincidence. As much as we all say we want better from the media, the numbers say otherwise. There’s a reason “First Take” dominates ESPN coverage while “The Sports Reporters” has gone the way of the dinosaur. There’s a reason we all know Stephen A Smith, Cathie Wood, Peter Schiff, and the menagerie of political pundits who seem to have an extreme opinion on everything. It’s not a coincidence that instead of dissecting the merits of a business like Upstart, we get this. It’s why we get calls for “emergency” interest rate cuts within minutes of yesterday’s stock drop. We even got a “Black Monday” reference!
Media doesn’t sell ads by tapping into your intellectual curiosity. It needs to tap into those primal emotions: fear, greed, and anger. It’s the Howard Stern effect in full force. It doesn’t matter if we like it or hate it, we’re watching it. There is no incentive to make you smarter, only what keeps your eyes glued to it.
Like me , you probably often read or hear others talk about “signal vs. noise” and why you should drown out much of what is served up on a daily basis. It becomes a lot easier to do so when you understand media’s incentives.
This is what we signed up for
Brace yourself. I’m about to do one of the top five cliches in financial writing: Paraphrase Morgan Housel!
Times like this are precisely why stocks have the highest average rates of return over the long haul. We’re getting paid to tolerate this nonsense!
Maybe it’s all those pod shops with their fancy “factor neutral” trades and “pure alpha” algorithms needing to quickly change course when interest rate spreads weren’t working in their favor anymore. Maybe it’s the flash crash of 2010. Or the flash crash of 2013. Or the collapse of Long-Term Capital Management. Or…well, you get the idea. Whatever the reason may be here are two things to remember:
The market ended up in 1987
The market ended up in 2020.
The market is an ecosystem. Companies in the market, like individual plants and animals in an ecosystem, will come and go. There will be times of abundance, times of drought and pestilence, purging wildfires, and devastating floods. And in between these events will be periods of calm and steady growth. All of these come at random intervals, and their appearance (both good and bad) don’t always coincide with other factors.
Nature finds a way. As long as humans wake up every morning and try to improve their lot in life, the market will also find a way.
(Yes, I paraphrased Morgan twice in the same subhead. He’s better at this than I am.)
I promise you this. If you intend to keep investing for several decades from today, you will experience dozens of days like yesterday and a few more 20%—30% market declines.
Stay the course.