What is the Enemy of Long Term Success?

The usual Mantra is BUY and HOLD even if your ass falls off! Then they go into some story about not being able to time the market. Just because YOU can’t time the market doesn’t mean the market isn’t time-able. The story goes “Oh the market fell and then Billy Bob sold, and now the market “recovered” and now he’s at a loss!” This isn’t how you time a market. How you time a market is, the market is high and I’ve made a lot of money, so maybe I should book some profit before the profit is lost.

There is some asymmetry to a market cycle. Early in the cycle there is mostly upside, late in a cycle there is ever increasing potential big time downside. At the end of a 12 year hyper-expansion there is MAJOR downside and not much upside. One thing to understand is as an investor you are really wall street’s sucker. Wall street wants to do one thing, sell you shit no matter what. The world is totally under water and the boobs on CNBC are quacking about green shoots. THAT crowd is paid to sell you shit. The Wall Street Journal is paid to sell you shit. Vanguard is paid to sell you shit and YOU are expected to buy shit no matter the asymmetry of the investment cycle, and no matter whether it’s healthy for your portfolio.

No matter that the rate of change of GDP has been slowing since Q4 of 2018 because that was the quarter acceleration peaked and turned to slow deceleration. It means yes there will be a higher high but a slowing higher high that’s bound and determined to become a major draw down.

We do simple calculations on our money, compounding calculations like this:


Here is a typical retirement portfolio. It starts at 50K, adds 50K/yr compounds at 6% and yields 3M bucks after 25 years. And we think that’s the ticket! 56% of our money comes from compounding. But wait that 6% needs to be in excess of inflation. If inflation averages 3% over the 25 years

Our 3M is really only worth 2M and we made only 33% on our money.

When you have a draw down how you get back to zero follows a formula Y=X + X*A.

Y = back to zero amount

X = starting amount after loss

A = % growth needed to get back to the start

L= % loss

So lets say you loose 10% on $100 how much do you have to compound to get back to $100?

100 = 90 + 90*.111, .111 = L/X = 10/90

So you have to compound an excess of 11.1% total ABOVE INFLATION over some period of time to get back to zero.

Let’s say you loose 30%.

100 = 70 + 70 *.428 to get back even ABOVE INFLATION. To calculate the % increase needed simply divide the starting point (in this case 70) into the % loss in this case 30. In other words L/X = 30/70 = .428. So you have to grow your money almost 43% above inflation to break even. Here is the sad truth

If you have $70 and need to grow it to $100 to break even and you have 3% inflation which yields only 3% of growth, it takes 12 years to get back to zero. Bet you never saw that on buy and hold CNBC. Bet you never saw that on some bogglehead web site. This is what you get with the old “you can’t time the market” mantra. It takes 12 years to get back to zero, with zero drawdown on the principal (say for retirement income). Lets say you correctly exit at a market top, say at $99 and the market falls 30% how long does it take to get back to $100 presuming you can time the market bottom. So the market falls from 100 to 70 and then you stick your 99 back in the market. How long does it take to get back to 100?

In one year you’re already $2 ahead. In the buy and hold case you’re $28 behind in one year

There is a saying

“The enemy of long term compounding is short term draw down.”

This analysis is a variation on a system control called a bang bang control analysis, where you model and optimize abruptly bounded conditions, like what if you loose 30% vs what if you loose 1%, how do you optimize those possibilities, solving for length of time to get back to zero. It assumes a steady 3% over inflation return. But even with those constraints it’s illustrative when Wall Street is trying top sell you FOMO, quick quick buy high it might go higher! Never mind 34M unemployed, never mind several years of projected negative GDP. Remember when you can’t identify the sucker, you are the sucker.

22 Replies to “What is the Enemy of Long Term Success?”

  1. Couldn’t agree more. I’ve been out of the stock market since September 2019. I’m told almost every how I shouldn’t try to time it and should allocate funds to low beta / quality, as they are more likely to have a smaller drawdown and therefore a better investment in the short term. In my view, holding cash that is not subject to a drawdown is a better investment at this stage (e.g. complete markets dislocation and deflation). My approach is imperfect, but I sleep better at night.

    1. I’m owning some cash gold and BTC and trading bonds. I make enough to pay the rent Sept 2019 was a good call congrats

      1. Been considering physical gold for a while. On a probabilistic basis (granted, using qualitative data) looks interesting under either scenario of deflation or inflation. Considering a 20% allocation. Curious to know where you stand.

        1. Hi Shawn

          I hold 8% as a core position and trade in and out of a risk range up to 15%. The trading range varies daily based on volume and volatility but on Fri it was 1684-1745. Gold closed at 1704 in the lower third of the range. When gold touches the low end I buy. As it approaches the top end I sell some. So if my core is 8%, I scale in at 1% or 2% increments till I get to 15% then when it gets close to the top I start to scale out booking gains. I use GLD as trading physical is harder but if you have a way to store it and sell it it’s probably safer. My brokerages allow trading GLD commission free and I trade in pretax accounts so I don’t generate taxes and have no profit drag on trading. Artemus has a 100 yr back tested portfolio that has 19% gold called the dragon portfolio

          1. Thanks. Read the serpent-hawk paper as well. Quite interesting. In fact, I reached out to Artemis to know more about the volatility product, although I would rather replicate the portfolio myself. I don’t have the same set of skills so have been looking for a good proxy (not clear to me there is one). Have you given that any thought?

          2. I own some BTC to fill that volatility function but not sure what Artemis does in terms correlation. I bought BTC when it was cheap and I’m up like 30x so it basically acts as a permanent call option in my portfolio. I can’t afford to sell it. BTC undergoes what is called a halfing about every 4 years meaning the miners get half as much BTC for expending the same mining cost. The value of gold is based on the amount of energy it takes to get an oz out of the ground +- speculation. This is why gold is a “hard” currency asset as opposed to funny money. The halfing does the same thing to BTC it makes it a harder asset. I believe this halfing makes it about as hard as gold, the next will make it harder than gold more desirable in an age of fiat manipulation. You can screw around with the number of dollars but its harder to screw around with the number of tons of gold because of the cost of mining and harder still to screw around with the number of BTC which is fixed at 21M when the last one is mined. BTC has its risks for sure and I wouldn’t devote 21% of my capital to it but that is the kind of asset that is contained in that class I believe.

            I’m sure Artemis optimizes the granularity of the assets contained in each category which is why they get paid to manage the mix. It’s unlikely you will be able to match their performance but what you can DIY may be good enough for your needs

  2. Okay.

    So like a lot of your posts, I don’t find much to disagree with. People are way too optimistic given the longest bull market followed by the greatest spike in job losses and a global pandemic. It isn’t time to buy what you see on TV because the reporter is cute and positive.

    But the question that arises in my mind and I’m sure others’ is okay, now what?

    We shouldn’t buy and hold, or read WSJ, or Bogle, or buy Vanguard funds. Yet we need to outpace inflation and not be a sucker.

    Gold is speculative. Real estate takes time. Oil is dropping. Bonds go down when future interest rates rise. Stocks are volatile. Cash dwindles over time in real terms.

    It is easy to point out flaws, risks, and to mock the gullible.

    So where are you guiding us, readers?
    Do you have a post somewhere about how and when to invest? What are your positive recommendations?

    I like your posts and ideas but I haven’t read 100% of them, so I may have missed some with specific actionable advice.

    1. BUY LOW SELL HIGH is my advice. The market has bounced and you now have a chance to get out. Managing money is hard, managing risk is even harder. Boggleheads have zero built in risk management and strictly rely on a never ending rising market. How does JL Collins manage his risk? He sells you books which may or may not have anything to do with reality.

        1. So if you loose 70% of your equity in a 80/20 1M portfolio and the 20% is preserved. This leaves you with 30% of 80 or 24% + 20% or a total of 44% for a net loss of 56% of your money meaning you have 440K left so you re-balance back to 80/20. The market doesn’t pick up and you get another 70% loss taking your 80% down to 44% once again, another 56% loss on your 440K leaving 246K of your 1M in your account. Re-balancing was exactly the wrong thing to do. In one year you’ve lost 3/4 of your money AND you need the money to live on because you have no job. You live in a house with a mortgage which is now in forbearance. The market does pick up 3 years later and jobs start coming back and you get on at Walmart. In the mean time you spent another 150K over 3 years of your nest egg leaving you with 100k of your 1M. How long does it take to get back to 1M? What could you have done differently?

          This is the problem with FIRE risk management. It presumes short V shaped recoveries with no job loss, and a continuing strong GDP. There were 2 nearly 70% market declines in the 1929 depression resulting in a 89% net reduction in wealth so don’t think it couldn’t happen.

  3. For many on the Boglehead or “VTSAX forever” bandwagon, this might be the first major drawdown in their adult life. By blindly following dogma, they’ve enjoyed a decade of generally up-market trends. But at the same time, they’ve intellectually short-changed themselves into believing that there is no other way to invest.

    Even back in Jan 2020, for most doctors, it didn’t take a stroke of genius to understand that Coronavirus was coming here. Despite this easily accessible knowledge, they sat back and watched their index funds get crushed simply because dogma dictated “time in market > timing the market”. Would you advocate in favor of watching your house burn down simply because you know that at some point, your insurance company will help you rebuild it in the future?

    The next problem is, even if you have the foresight of predicting a crash, many docs have no idea what to do next, or, get into a cycle of analysis paralysis and make their move too late.

    As mdonfire eluded to, moving to cash, gold, or BTC were readily available options. But there are infinitely more tools you can use. I’m an active stock trader. In the past few months, my net worth has reached all time highs (and I’m already retired). I’ve shorted cruise stocks, swing traded PPE manufacturers, went long on semiconductors, and generated plenty of income by selling call options.

    There’s an entire world of investing out there. Don’t you owe it to yourself to learn about it?

  4. There are no widely available alternatives. (as Wealthy Doc points out).

    Also, you have to hold some inflation protection assets. If the Fed decides they would rather flood everyone with cash, avoid deflation, and spur inflation… the cash will be the worst-performing asset class.

    We don’t know what they will do.

  5. You logic almost makes sense, but the problem is you assume one can identify tops and bottoms. You also assume certain recover pattern (slow for many years), which does not have to be the case and was not the case in previous bear markets, though it definitely took much longer before comparing to this time (assuming this time it is over – assumptions, assumptions…)

    The last 30% drop was not followed by +3% a year for 12 year growth, it was followed by 30% recovery. Of course we are still not back to even and market can drop again but maybe it drops a little and goes up again or maybe it will chop around for a while and then goes up – nobody knows what is going to happen. Everyone was saying there will be no V shaped recovery and that’s exactly what happen (so far). It is hard to make predictions especially about the future.

    How are you identifying tops and bottoms personally? Do you rely on some sort of a market cycle or valuations indicator? Do you rely on your gut feeling? How has it been working?

    1. This isn’t recession. This is depression. Our next move is to go from depression to recession. Recession is up from here. Probably take a couple years If you look at 1929 and 1937 which were phase 1 (collapse) and phase 2 (recession) of the depression era the 60% drop was followed by a 50% retracement followed by a series of drops to a net 89% drop. It’s like dropping a basket ball off a roof it never gets back to zero. My impression is based on data and macro. I do nothing by gut feeling, my entire analysis is rate of change 1st and 2nd derivative analysis. I don’t pick tops I pick the changes in sign of rate of change. If you have a growth curve who’s second derivative goes from plus to minus growth is slowing from that point on and will eventually force a peak and then a decline so the point is to not pick a peak but take your money during growth and reduce you exposure as the growth peaks. I’ve been selling since 2107. Volatility happens slowly and then all at one. When volatility happens your ability to predict goes out the window so your best bet is to sell the risk and go flat and live to fight another day. This time EVERY volatility measure went out to +5 standard deviations stocks bonds currency debt commodities. I’ve never seen that. This makes the world un-investable. As vol falls which it is doing now, the world enters something called the fuck bucket where you can get killed due to market chop. So the question is this a dead cat bounce in a downward trend (a time to take risk off) or a resumption of prosperity (risk on)? Rising unemployment is always the last nail on the coffin. This sucker is not dead it’s cremated.

      Your perspective is typical of a video gamer. You think the market drops 30% 34 million people get laid off the government squirts some money up everybody’s ass with BIG CHECKS and everything is OK. That analysis shows no insight into the destruction that has occurred. The reason the vols all went out 5 SD is because everything is levered to the hilt and when it hits the fan levered things die first and fastest. When levered things start dying you sell every thing you can to make the margin call so you have some time to unwind your position otherwise you’re going to zero. People hate it when they go to zero. It’s the reason gold fell. A ton of gold went on the market to cover the margin call and supply demand. Since the government isn’t buying oil with big checks, oil actually went negative meaning people were paying you to buy it, because owning it was such a liability. That is the mark of depression, when the life blood of the economy, oil, is too risky to own. When did you ever see 34M unemployed in 4 weeks? When did you ever see oil go 50 freakin bucks/barrel negative? When did you see GDP drop from +3.3 to -4.8 based on 2 weeks of pandemic? What do you think will happen at the end of June? When did you ever see 80K of your countrymen dies in a short 2.5 month period? When was the last time Shell and Exon cut their dividends? If you think you’re up 30% or some mumbo jumbo you’re on drugs. If you are up 30% FREAKIN SELL because the market gave you a ticket off the elevator, next stop hell. But of course you won’t sell, you’ll hold because that’s your mantra. “Every day in every way I’ll never sell and I’ll continue to buy high because dollar cost averaging is the ticket! It’s a free country, go buy ya some Q’s. Why I heard Kudlow say something about green shoots and King Dollar. I can afford to not be in the market. Eventually I will get back in, or not. I have a big enough pile to live many many decades on cash alone Can you afford to be in the market? Are you Mr 4 x 25? Adjusted for inflation and dividend reinvested the S&P has returned just 3% per year since Dec 1999 to April 2020. A full % below 4 and nothing like the 7% most people plan on, and you’re wondering about my narrative?

  6. MDonfire,
    All I need to know right now is what Buffett is doing. Not what he SAYS, what he is DOING. He is still sitting on his cash. That says it all for me.

    1. Not only that he sold his airlines. Boeing hasn’t had 1 order in 2 months. There are 17,000 airplanes newly mothballed. Sure doesn’t sound like a recovery to me.

  7. Yes. It is also concerning that he doesn’t seem to be buying back his own stock, despite being below 1.2 X book value, which is the level he stated he would do so in the past. He must really think things will get much worse.

    1. Who says you can’t time the market? OH that would be boggleheads, mostly plumbers and itinerant software engineers who have experienced some adversity but never really experienced true mayhem. BRK.B is on my shopping list but not today.

  8. Hey Gasem,

    Avoid debt. Keep working.

    If you can not work. Keep a lot of cash.

    Hope you are doing well. Keep your ladies safe!!!

    1. Hi MB good to hear from you

      1 Avoid debt
      2 Avoid leverage, reduce risk
      3 Keep a lot of cash Gold is considered cash
      4 Diversify your risk with a job. depending your expected longevity and
      assuming a job exists
      5 Hedge in some way against real inflation after the deflation ceases.
      6 Understand the FEDS game

      The market is no longer the free market means to discount supply and demand. It is a political utility which uses your money to satisfy and leverage their goals at your expense. Oh look the QQQ is green for the year! Sheesh they spent 8 trillion to make the QQQ green and 34M are still unemployed. That 8T will need to be paid for with inflation or increased taxes or default at some point.

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