My Million Dollar Pandemic Mistake

I moved my 401Ks from equities to bonds on 2020-03-09, the week before the market bottom. For various reasons, I did not move back into equities until May 2021. I finally admitted to myself that I shouldn't try to avoid a market peak if I obviously couldn't avoid a market trough.

But my fundamental mistake wasn't merely that I tried to time (i.e. outsmart) the market. My real mistake was rationalizing the pandemic as a one-time excuse to end my 25-year streak of following Less Antman's investment strategy. Less explains it better than I could, below. (And no, I can't claim that his "check the stores" test justifies my mistake. I work in e-commerce, and we were never closed.)

(1) The wealth of a society is in the goods and services produced, and not in the monetary system. Check the stores: they're still open, providing lots of goods and services, and owning shares of the world's most profitable businesses makes your wealth as safe as the continued provision of those goods and services (if they disappear, money is useless).

(2) SOMEBODY has to own stocks at all times: the so-called "flight to quality" actually represents some people panicking out of the true source of wealth and handing ownership of these sources at fire sale prices to other people in exchange for green pieces of paper with pictures of presidents on them that aren't guaranteed to be redeemable for anything.  Someone once described a bear market as "that time period during which stocks are returned to their rightful owners."

(3) Diversify, diversify, diversify.  Own lots of businesses in lots of industries in lots of countries.

(4) The much higher rewards of equities over the long term result primarily from the uncertainty of returns over the short term.  Thank the volatility: it is your best friend in the end. Here is why:

Stockholders are owners of businesses, and owners get paid last, after employees, contractors, suppliers, and creditors. So changes in available revenue affect owners first, and that is the source of a great deal of uncertainty and occasional outright panic. Point granted: stocks are much more volatile than bonds and cash, and employees have a much more predictable flow of wages than their bosses do of dividends and capital gains. Yet since owners are paid last, in the long run they can be expected to be paid most — not always and certainly not in all companies, but for someone who owns a globally diversified portfolio of the world’s productive businesses, it’s a pretty good guess. My purpose in life is to tell my clients this as often as necessary.

So might I suggest that you remind yourself during scary times, why you’re invested in stocks? You’re providing the service of accepting the short-term uncertainty that others want to avoid. You’re the rock, the stable source of capital for businesses, without which market economies cannot function. Be a rock and react like a rock to the non-news that human nature goes through periodic bouts of extreme fear.