Rational Reminder

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Episode 25: The Year End Round Up: Recapping Recent Market Performance

This week on the podcast we are starting to wrap things up for the year, doing some house keeping and looking back at recent trends in the market. First of all we talk a bit about the podcast going forward and have a few comments on ratings and reviews. We also look at some of the upcoming content you can expect early next year! We chat about the client survey we recently held and what the data from this tells us. From there we move into more general information on the relationship between risk and profitability and try and explain why they are so closely linked. We also get into the market’s performance this year and the apparently bad year it has had. This exploration is located in the broader context of historical data and evidence based investing strategies and we try our best to show how a bad year like 2018 is not a reason to be reactive in you investments. For this and more, join us today!


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Key Points From This Episode:

  • The first critical review of the podcast. [0:01:52.3]

  • Some of the upcoming content for the new year. [0:02:52.0]

  • The recent client survey which we completed. [0:04:56.3]

  • Interesting data that we collected during this survey. [0:07:02]

  • The blog post from Michael James about our chat with Glenn Cooke recently. [0:08:57.8]

  • How is being profitable riskier? [0:12:39.9]

  • Behavioral explanations for factors and market timing. [0:15:10.7]

  • The market this year and how it has dipped. [0:16:13.3]

  • Comparing this year’s downturn with 2008. [0:17:38.6]

  • This generation’s investors and risk seeking. [0:21:04.7]

  • Understanding standard deviation in this context. [0:22:58.3]

  • The potential impact of social media on markets compared to 2008. [0:26:02.4]

  • The human bias towards action when in danger. [0:27:12.8]

  • Don’t leave your seat to get a hot dog! [0:29:04.2]


Read The Transcript:

Ben Felix: This is the Rational Reminder podcast, a weekly reality check on sensible investing and financial decision making for Canadians. We are hosted by me, Benjamin Felix and Cameron Passmore.

Cameron Passmore: So this is the week before Christmas. We will have new material next weekend, the week of New Year's, but we had some good stuff this week we covered off. 

Ben Felix: Yeah, we've talked a bit about some I guess podcast housekeeping items, just some stuff more specific to the podcast than to investing or financial markets, but it's still important for us to talk about.

Cameron Passmore: Covered off the client survey we recently did, had some interesting data from that.

Ben Felix: And we talked about the market volatility and that was pretty much it, it was a good little episode.

Cameron Passmore: But it's good. It's timely I think so it's important information to share. So have a listen.

Ben Felix: Yup, we'll talk to everybody. I guess I was going to say, "See you," but we'll talk to you in the new year.

Welcome to episode 25 of the Rational Reminder podcast. It was a bit of an interesting weekend for the podcast. We jumped in the charts. It was kind of fun for Cameron and I to watch, but I think we peaked at number 13 in the business category for all podcasts in Canada.

Cameron Passmore: And with some pretty big names.

Ben Felix: Yup, and we are number three in the investing category. So as you get more niche, I guess it's probably easier to get high up in the charts, but in the investing category, we topped out at number three. We've dropped off since then, but it was fun while it lasted.

Cameron Passmore: Yeah, and if you're listening to the podcast and you do enjoy, we would love to hear your feedback and any reviews that you can leave would be great.

Ben Felix: Yeah, it's always... It's exciting. This is like my fourth child. I had to think about how many kids I have. This is like my fourth child. So when we get a rating or a review, it's nice.

Cameron Passmore: It's not always nice. I mean, we got one last week, which while nice to get the review, I know you texted me right away and copied and paste it over to me. So why don't you talk about the review we did get?

Ben Felix: Yeah, so this is the first time that we've gotten critical feedback through the iTunes review system. We've gotten lots of positive feedback, but this is the first one that was, I don't know if I'd call it negative. I think we called it constructive. The listener wrote that they've actually stopped listening to the podcast, according to them, and they've unsubscribed and their complaint was that we do too much selling. We're selling our business too much.

Cameron Passmore: But they said that they understand that's the point of it. And that's actually not the point of the podcast.

Ben Felix: And we don't feel like we're selling.

Cameron Passmore: No, we just think it's important to take advantage of technology that allows us to share what we're thinking. We had a lot of clients ask for that and it happens to be a great medium to be able to do that.

Ben Felix: But anyway, if we come across as selling our business, we apologize. And if people do feel that way, we are conscious of it now. So we'll be extra careful and sorry if we offended anyone, I guess.

Cameron Passmore: So this is the last time we'll be in the studio for 2018.

Ben Felix: People don't know we're in the studio.

Cameron Passmore: Well so we have our new studio. People may have seen it online on Twitter and LinkedIn, but we have a new studio. So this is our last recording. We will have original episodes coming up next week, special guests that I recorded a month or so ago in Los Angeles. And then the week after we have another guest.

Ben Felix: Do you want to say who the guest is? It's a pretty cool guest.

Cameron Passmore: A pretty cool guest. The guest is the co-executive producer of the Big Bang Theory, Dave Goetsch, very interesting interview. He was a great guy, really fascinating the impact this philosophy had on him. And then the week of New Year's, we'll be with Robin Powell, who is with Tevye, the evidence-based investor. Again, fabulous interview. He had a lot of great insights on what's happening in the UK.

Ben Felix: Yup, he's done a lot of work in generating media to support evidence-based investing. Anyway, two good conversations. So even though we're not recording, we will have stuff coming out. And I think it's worth talking a little bit more about the study. You just glossed over it, but we, within our office here at BWL in Ottawa, it's a closet. It was a closet. We actually gutted a closet and put the foam sound padding up, got a little Rational Reminder sign in here, but this is where we'll be recording the podcast from going forward. And we've actually got two video cameras in here. So starting, I don't know when, when we're ready I guess, we're going to start filming ourselves recording the podcast and posting those videos on YouTube. So hopefully that's nice for some people

Cameron Passmore: Yeah, and it's amazing. We're actually almost six months into podcasting, so it has been fun. And the goal is to always improve them. Again, any feedback, love to hear it.

Ben Felix: Yup, and to finish off the year because we are rounding it out like Cameron said, we did want to give a couple thank yous. Matthew Passey, who's our producer. He's been with us for a few months now. He's been fantastic. So thank you to Matthew. And the PWL marketing team has also been very supportive of the podcast. So thanks to all those people, anyway.

Cameron Passmore: So do you want to talk about the client survey that we did?

Ben Felix: Yeah, so we participated in a client survey. Is it every year or every couple of years?

Cameron Passmore: It has been every year now.

Ben Felix: Every year, yeah. So it goes out to a bunch of advisors within our peer group. And we had 199 survey responses, which is pretty good. That's about half of our-

Cameron Passmore: I'd say roughly half of clients participated and then we get to compare those results to the clients who responded to other advisors in our peer group across the country. So there were 6,874 total clients in the pool. So it's neat how we get to compare our data with other peer firms. Some of the outliers really jumped out at me. I don't know if you noticed this or not, but 21% of our responses were age 35 or younger. Compare that to the group, which had 3%.

Ben Felix: That's crazy. It's a big problem within the whole wealth management business is that the client demographic, there are so many older clients and older advisors too.

Cameron Passmore: Older advisors. I think the average advisor age I think is 54.

Ben Felix: Yeah, sounds about right.

Cameron Passmore: So we have a lot of younger people in our team, your 31?

Ben Felix: Turned 31 yesterday.

Cameron Passmore: 31 as of yesterday and I'm 52. So certainly our average age is younger than the average age in the industry. And we also had far fewer clients over the age of 55. So of the participants, we had 42% over the age of 55. And the group average was the group had 79% of respondents over the age of 55.

Ben Felix: Yeah, it's neat data. There's other cool stuff in there too. Like the things that people value the most, which is experience with clients like them, returns, which I guess you'd expect because that is clearly important. And one of the most interesting pieces of that survey question was that the higher the net worth of the respondent, the more important returns and fees came. I wonder what does that tell us? People are more aware as their assets grow?

Cameron Passmore: I think people perhaps look at fees in dollar terms, not percentage terms. Taking a large portfolio, take even a small percentage of a large portfolio becomes a large line item expense. Some of the values received that they saw in service, sense of security, peace of mind, no real surprise there I guess, knowledge of their personal financial situation, progress towards their goals, and again, returns.

Ben Felix: Yeah, that's interesting. Interesting to see what people who are actually receiving financial advice see as the value of paying for advice.

Cameron Passmore: And then there's one question about expectation of annual returns going forward for the stock market.

Ben Felix: I thought this was a funny question. Why would they ask clients responding to a survey about... Is it to just gauge how their expectations are going to match up with reality?

Cameron Passmore: Pick up the greed factor? I also thought the bands were kind of wide. So 35% said between zero and 5% and 45% said between six and 10. And hardly anyone had expectations over 10%. That surprised me. I thought a lot of people would have expected higher returns than that.

Ben Felix: It's funny that the majority of responds to that question, 45%, between six and 10%, that's more than we would expect for 100% equity portfolio on average over the longterm. So are people's expectations higher than they should be for portfolio returns?

Cameron Passmore: So one other piece of feedback that was the most persistent in the write in, and I think a lot of clients may understand this. So we had a lot of feedback about the online experience clients have with us. I know this is very near and dear to your heart.

Ben Felix: Yeah, we've been talking about it for years and it's been a challenge to actually do anything about it because we've always taken the position that we don't want to build. We don't want to become a technology company because that's not who we are, but at the same time, there are no... Well there have not been any third parties providing the services that we need in terms of technology. But we know, especially based on this recent survey, that it's a major pain point for clients and we're working on it.

Cameron Passmore: Yeah, we heard loud and clear and we're actively working on it now. We think we found a solution.

Ben Felix: I hope we have an announcement within four months. I don't think that's over promising. Anyway, last week we had... No, that wasn't last week, sorry, that was... When was Glenn?

Cameron Passmore: Two or three weeks ago, Glenn Cook.

Ben Felix: So we had Glenn Cook who's he's the founder of Life Insurance Canada website. And he came on to talk about life insurance, clearly. And Michael James, who's one of my favorite Canadian personal finance bloggers. I don't know if he read the transcript or listened to the podcast. If he listened to the podcast, that's pretty cool. I think Michael James is... I think he's pretty cool. But anyway, he picked up that episode with Glenn and he wrote a blog post about it. So what Michael found interesting was the reasons Glenn gave for when you would buy permanent life insurance. Michael said, "I never really got when you would do that before, but after listening or reading or whatever it was, he got it."

So what Glenn said was if you have max RSPs and TFSAs, if you want to guarantee a death benefit, so like Glenn during the podcast gave the example that he grew up without financial means. So he wants to make sure his kids have financial means when he dies. Therefore he's got permanent life insurance. And the last reason that Glenn gave was if you want to make your legacy as large as possible, and that one hinges on the idea that insurance will grow faster than investments after tax, if you're investing in a taxable account.

So Michael, he gave commentary on Glenn's reasoning, but one of Michael's comments was that he would need to dig into the details of universal life insurance policy to understand if that's true, if you can actually build more wealth with insurance than you can with a portfolio. Now we've looked at that. So we can talk about it. It was probably two or three years ago that we really dug into this, but I don't know, I don't think it would have changed. So in the past, when we looked at it, even if you're taxed in the highest marginal tax rate, it's really tough to claim that you're going to get a better return through insurance at death at normal life expectancy than you would get through stocks, even with taxes taken into account.

Cameron Passmore: Yeah, maybe less volatile. Especially at end of life. If that happens to be a bad time in the markets, there's always that risk at that point.

Ben Felix: Sure, you could make the argument, but given a long enough... Say it's someone who's 30 years old or 40 years old, given a long enough time horizon, you'd expect-

Cameron Passmore: Well especially with the low cost investment options available today.

Ben Felix: That's another big part of that conversation. Yeah, well the costs inside of the UL... Because you can make the argument that while you can buy an equity index in a UL policy, but you're going to pay a 2.5% Fee.

Cameron Passmore: You can't get the same cost structure.

Ben Felix: So anyway, you can't really compare even after tax, you can't really compare equities and insurance, but you can very easily compare taxable fixed income investments to say universal life insurance policy with a guaranteed investment inside of it, which would have a low fee, like if you're buying GICs or whatever inside of a UL policy, you don't have those high psych fund type fees. So anyway, to answer Michael's question, not that he asked us this question, but to respond to Michael's comment. If you think about it from an asset allocation perspective, if you want to add in insurance to your overall asset allocation to build your wealth in a tax efficient manner, you can do that, but it means that you're replacing fixed income with permanent insurance. So if you take, I don't know, 10% of your assets and put it into a permanent insurance policy, that becomes part of your fixed income. Now what's the implication of that?

Cameron Passmore: You have to make sure you have more equities. So if you were 60/40 before, maybe now you're 70/30.

Ben Felix: Right, so it's not like you just go, if you're a 60/40 investor, you go put 10% of your net worth into permanent insurance policy and expect to have more wealth at the end. It's not the case because now you've decreased your equity exposure effectively. So if the goal is really to maximize after tax wealth, whatever you allocate toward insurance counts as fixed income, which means your financial market portfolio gets more aggressive, which might make you sad. If you're a 60/40 investor and you're stuck with a 70/30 portfolio, it takes a certain level of rationality to live with a 70/30 understanding that you have 10% in a permanent policy. So anyway, those are our thoughts on that. We did have a pretty good listener question.

Cameron Passmore: That was a very good question, actually. So basically he's a fan of behavior based explanation for factors, which is what we've talked about. So small cap investing, smaller stocks are riskier, therefore have a higher expected return. Value stocks, which are stocks that have gone down in price, they've gone down in price for reason, there's a risk story to explain the higher expected return. But if two stocks have the same size factor and the same value or price factor, but one is more profitable than the other, how can the profitable stock be riskier? That was the question.

Ben Felix: It was basically saying, in the last podcast, we took that deep dive into factors and we, not bashed, but we stated that we're not the biggest fans of behavioral explanations for factors. So size and value, you can make behavioral-

Cameron Passmore: But how is it being profitable riskier?

Ben Felix: Right, so that's the question. So they said, "Okay, I hear you guys, you don't like behavioral explanations, but I also know that you guys like the profitability factor. So how do you reconcile that?" Why would a more profitable stock be riskier? So we do have a risk-based explanation for how that works in a portfolio. And what it is is that when you take two stocks, like what Cameron said, you take two stocks and you hold constant size and relative price. So market cap is the same and the exposure to value. So it's what I said, the relative price. So size and relative price are the same, but one's more profitable. The one that's more profitable has got to be riskier. And the reason it has to be riskier is because it has the same relative price as the less profitable stock.

Cameron Passmore: Because the market is pushing the price down to that level even though it's making a profit.

Ben Felix: It's discounting the additional profits at a higher rate, which means it's a risk to your asset. So that's the risk-based explanation for profitability in portfolios. And there are other ones too.

Cameron Passmore: Interesting thing about risk is that risk isn't arbitraged away because people might say, "Well, if that's the case, people would arbitrage that away over time and how they price those assets." But no, if it's riskier, you have to command a higher expected return. Otherwise, why would you invest in it?

Ben Felix: This is why... I can't say that we disagree with behavioral explanations for factors because there's a ton of fantastic research and data showing that they make sense. The challenge that I have with behavioral explanations, and I don't want to go too deep into this because we talked about it last time, but the challenge that I have with behavioral explanations is that they can be arbitraged away if people can behave more rationally. Now will people behave more rationally? Who knows, but will risk go away. Will people all of a sudden be willing to take more risk without the additional expected return? No, that doesn't change.

Cameron Passmore: We had a client ask a question this week, which we have to do more research on, but about a market timing model that has been shown to deliver higher expected returns. And I'm like, "Well what's the reason for the higher expected returns?" Everyone has access to the same data. And if someone else finds that data, that can be arbitraged away because there's no reason to expect that model to persistently deliver higher expected returns.

Ben Felix: Yeah, the behavioral explanations hinge on people behaving irrationally and limits to arbitrage. There are reasons that people will not arbitrage things away. And that's what behavioral explanations for factors hinge on. We had a long conversation about that recently, but again, I'm not comfortable taking clients' money and investing it based on other people's behavioral biases or limits to arbitrage. Because if someone figures out a way to get around the limit-

Cameron Passmore: Or a model is not rooted in academic evidence.

Ben Felix: Yeah, anyway, so we gave the risk-based explanation for profitability and we dug into why. We reiterated why we're not crazy about behavioral explanations for factors.

Cameron Passmore: So given what's happening in the markets, do you think we should maybe talk about that a little bit?

Ben Felix: Oh, you mean you want to go to cash?

Cameron Passmore: I'm not suggesting that, but I think it's good to, to review what's been happening.

Ben Felix: Yeah, all around, it's been a pretty bad year in the stock market. Canada, by the S&P TSX, is down about 9% for the calendar year, year to date. And US market is up a little bit in Canadian dollar terms.

Cameron Passmore: Thanks to currency.

Ben Felix: Thanks to currency, but down in US dollars, or down for a Canadian hedge investor. And international, and I just looked at XEF, which is an international equity ETF listed in Canada. So this is a Canadian dollar return.

Cameron Passmore: Taking currency, yup.

Ben Felix: It's down 7.17% for the year. And the DFA 60/40 portfolio is down five and just over 5.5%.

Cameron Passmore: So garden variety volatility. If you just look at the numbers, there's nothing that dramatic there.

Ben Felix: Well it's nothing that dramatic when we're talking about percentage points, but when you're looking at your... The numbers, they add up. 5% on a half million dollar portfolio, that's not a small negative number to see in an account. So I get that people feel anxious, but you're right. This is garden variety. This is nothing.

Cameron Passmore: We also have a whole generation investors that have had a great decade since 2008 and haven't really seen a lot of real downside. And I can tell you, this is nothing like 2008 downside at all.

Ben Felix: I asked you about that this morning because people are nervous now. And we always talk about how we never get client phone calls and we haven't had any recently, but we've had more than zero. And so I asked you, what was it like in 2008? If people are nervous now, and people are asking us for reassurance now, this year's negative return was maybe a day.

Cameron Passmore: Oh absolutely. There were days back then, and the market was a lot lower, where the DOW would be down 400, 500, 600 points, day after day, just getting knocked down like crazy. You see assets just melt away. We were down 15, 20, 25%. And these are diversified portfolios.

Ben Felix: Yeah, you mentioned that we've got a generation of people who haven't seen much or any real volatility. I found one post about that that was... It's crazy. I almost find the data hard to believe, but it's data, so you can't not believe it. It is what it is. But it was a post by Jared Kaiser, who's he's with Buckingham, which is a similar-ish firm to PWL in the States. And he wrote about how from March, 2009, through October of 2018, the S&P 500 has had returns that it would not be unreasonable for nobody that is alive to ever see again, that's how good they were on a risk adjusted basis. So the actual, the percentages, and this is from March, 2009 through November, because I got more recent data than he had.

Cameron Passmore: So from the bottom, March, 2009 was the bottom.

Ben Felix: So annualized return of 16.97% with a standard deviation of 12.44%. Now I had somewhere else in my notes for a different point, but that's significantly higher returns with significantly lower volatility than the broad history of the S&P 500, going back to 1926. Now what Jared Kaiser did in this post is he took all of the monthly returns from 1926 through October, 2018. And he used a method called bootstrapping to create 100,116 month periods. So 116 months is the-

Cameron Passmore: So it's 90 years of monthly data in a pile, in a bucket.

Ben Felix: Correct.

Cameron Passmore: And when you pull from that bucket to bootstrap into your sample, then fill the number back in, and re-pull.

Ben Felix: Correct, so you record the number, put it back in the bucket, pull the next one out. And the significance of 116 months is that that's the number of months from March, 2009 through October, 2018.

Cameron Passmore: He replicated that time series on a bootstrap basis from over 90 years of data? Got it.

Ben Felix: Correct. So if we assume that, and it's not reality, obviously, but if we assume that every possible monthly return is captured in that big data set, obviously, it's a model. It's not reality. But if we make that assumption, then what we can do is recreate 100,000 variations of reality. So his finding, which it blew me away. And he wrote in the post about it, that it blew him away too, is that of the 100,000 samples, only 0.57%, so less than 1%, nearly half of 1% of the 100,000 samples produced risk adjusted returns as good as or better than the actual returns of the S&P 500 over that time period.

Cameron Passmore: So we have a generation of investors that have experienced something that is so unlikely to ever happen again.

Ben Felix: Yeah, well Kaiser writes in the post that probably nobody who's alive now will ever see returns like that again, anywhere. And so it speaks to your point though, there's a whole... That's 2009 through 2018. So that's roughly 10 years where anybody that started investing over that time period, of course you're not-

Cameron Passmore: So we have a generation of basically take a more risk, you get more return. So you have risk seekers, I suppose their risk avoiders because you really don't know what it's like until you live through it.

Ben Felix: Right, I'm probably guilty of that too. Maybe, I don't know. I feel like I'm pretty good at being detached emotionally, but I'm 100% stocks. I don't worry about the value of my accounts, but you're right. I have not lived through a 50% drop. Anyway, so this whole thing kind of got us thinking about what is normal volatility? So we know the S&P 500 had... Jared Kaiser wrote it, the post was called The S&P 500 Goes Supernova.

So we know the S&P 500 has gone supernova over the last 10 or so years and we're probably never going to see that again. But when we look at the broad set of data, what does normal actually look like? So we didn't do anything fancy, but we didn't really need to. You go back to 1980 for global stocks, and this is using the MSEI world index. There've been 11 corrections of 10% or more and eight bear markets with a decline of 20% or more that lasted at least two months. Well clearly where we are now, we are not even really close to a 10% decline all around the world. So we're not even in that.

Cameron Passmore: So that's global, that's not just the US market.

Ben Felix: Nope, that's global stocks, correct.

Cameron Passmore: So if you have a global portfolio.

Ben Felix: It's not overweight Canada, I think that's just global, and that's in US dollars.

Cameron Passmore: So it's roughly every three years you have a correction of 10% or more. And every four to five years, you have a decline of 20% or more.

Ben Felix: Now this year from the high point of 2018 to the low, which is basically now, the S&P 500 has had a drop of 13%. So that's not the year drop, that's from the high point, because it went up for a bit to the low point now. So 13%. Now we started wondering, "Okay, how abnormal is that? If it is abnormal at all?" So all we did is we looked at the annualized return of a few indexes and overlaid the standard deviation and just moved one standard deviation from the mean left and right, just to look at what is a normal return. And we'll talk about the numbers, but basically we're so well within normal that it's not even worth talking about almost, but it is because people are nervous.

Cameron Passmore: So one standard deviation is how much in terms of time?

Ben Felix: Well 68% of outcomes are captured within one standard deviation.

Cameron Passmore: Each side. So going back to 1926, the data you dug up, the S&P 500 has had an annualized return of just over 10% with an annualized standard deviation of between 18 and 19%.

Ben Felix: 18.62 to be precise. And that's just... We have to come back to the S&P 500 going supernova post, where you remember the return was 16.97% with a standard deviation of 12.44. And you look at the full data set, and it's got-

Cameron Passmore: Substantially higher return with whatever that is, 40% less standard deviation?

Ben Felix: Yeah, so I thought that in itself was-

Cameron Passmore: But the band on that, then let's just round it just to make the math easy. So 10% plus or minus call it 19 two thirds of the time. So 10 minus 19 is minus nine. So two thirds, or I guess in a normal distribution, one third would be negative or below the expected mean. So these are absolutely normal bands that we're in right now.

Ben Felix: Yeah, the spread for one standard deviation on either side of the average return of the S&P 500, going back to 1926, we're looking at between a negative 8.5% and positive 28.73%, for US stocks anyway, they're slightly negative in US dollars, slightly positive in Canadian dollars. But either way, we're within one standard deviation of the mean. So that's the definition of normal, that's the closest to the mean in a standard normal distribution. So we looked at Canadian stocks to annualized return going back to 1956 of 8.89%, standard deviation of 14.9%. So this year we're bumping up on the second standard deviation from the mean for Canadian returns, but still, we are within the normal distribution. That is the definition of a normal return. Assuming that returns are normally distributed, which they're not perfectly, but that's okay.

Cameron Passmore: And while you may not be happy, if you have a proper strategy that you know is being rebalanced, you won't be upset.

Ben Felix: Right, Ken Fisher had a great tweet. When prices go down, so markets are down right now. And like you're saying, some people are feeling nervous or sad or whatever, but Ken Fisher tweeted, "Can't you just feel the falling market making people who were more optimistic become more pessimistic? Rationality would argue for lower prices, making people even more optimistic." That's true. Prices go down, expected returns go up.

Cameron Passmore: If you believe in capitalism.

Ben Felix: Ken Fisher's the gospel of capitalism.

Cameron Passmore: Speaking of social media and Twitter, you see the stats I dug up here? I saw on Twitter this afternoon. The question being raised by this post was what impact will Twitter have this time compared to 2008? So I just dug up the data. So in 2008, Twitter at 6 million users, now it's over 328 million users. And look at Facebook, Facebook at 100 million monthly users in 2008, today's 2.2 billion monthly users.

Ben Felix: What does that do though? It makes information spread more quickly. Does that make markets more efficient?

Cameron Passmore: Does fear spread faster? Do people look for... Because people, when things go bad, people will want to take actions. Now will they be perhaps looking for other strategies? If you don't have a sound strategy that you in now.

Ben Felix: Or are the people trading the ones on Twitter? Who's doing most of the trades? The institutions, are the institutional traders sitting on Twitter waiting for their signals to sell?

Cameron Passmore: I don't know.

Ben Felix: I don't know either. I think there's an argument that it can make markets more efficient because you can do the dollar sign hashtag thing to talk about stocks. So people are very easily able to share information across a big platform with tons of users.

Cameron Passmore: There's also a ton of data going out showing these arguments that we're making, which is this is kind of normal. Some people do some really cool data point analysis.

Ben Felix: This is normal. There's no argument about that. But the challenge is, even though this is completely normal, and we talked about this last time I think, people have a bias for action. So that the market's going down, stuff is happening, you feel like you have to do something, and that's probably normal. That's probably an evolutionary response to danger.

Cameron Passmore: Definitely.

Ben Felix: Yeah, so people feel like they need to, I don't know if it's going to cash or if it's changing the strategy or buying a different fund or whatever it is, but we've always got to keep in mind that even if, make the assumption that you can time the market perfectly on the way out. So you know, through some clairvoyance, that the market's going to drop. So you get out. Okay, step one. Now what? You've got to get back in. When do you get back in? You don't know, and if you think about-

Cameron Passmore: So someone has to buy it from you, and they're wrong. So they're making a mistake by letting you out. And then they're going to be dumb to let you back in at a low price, because there's always a counterparty on every trade. And there's a lot of smart people on the counter side of the trades.

Ben Felix: I found a great chart from Vanguard and they showed that 12 of the 20 best trading days, and this is for US markets from 1979 through 2018, occurred in years with negative annual returns. So you see a fantastic day, the best day you've seen in years on the market. So you decide, "Okay, I'm going to get back in. Its time." Pretty good chance that day is going to occur within a year that is negative. And the same thing was on the flip side. Nine of the worst trading days occurred in years with positive annual returns. So again, you see a terrible day, so you get out, pretty good chance it was a positive return. The other piece of this market timing discussion is that returns come in bursts. If you miss the good days, which you can't predict, there's a pretty good chance that your returns are going to be substantially... Well your returns will be substantially lower than if you just stayed in.

Cameron Passmore: One of the best analogies I ever heard on this was going to a hockey game. So the hockey game starts, it's all no score and you go and get a hot dog and all of a sudden, two quick goals while you're not in your seats. The point is to be in your seat. You don't know when the goals are going to be scored.

Ben Felix: Yeah, exactly. And there are different things that people try and do like using, for example, the Shiller Cape is a common one, cyclically adjusted price earnings. So if the market valuations are high, you use that to get out and use that to get back in. There've been studies done on this as well. And over 10 year periods, explains about 50% of the difference in returns. So even 50% in itself is not great, but that's only over 10 years. So you shorten the timeframe, one year pretty well zero explanatory power. So if you're trying to time the market using the price earnings, there's no data to support doing it.

Cameron Passmore: So as you'll hear next week in the podcast, one of the things that Dave mentioned, Dave Goetsch, is to embrace volatility, embrace the risk. And this gave him tremendous amount of peace in his life. So I think that's the key takeaway, embrace risk, understand your strategy.

Ben Felix: Embrace risk, absolutely embrace risk. You need risk. If you're not taking the right kinds of risks, if you're not taking risk, you should not expect a meaningful-

Cameron Passmore: Why would you deserve a higher expected return if you didn't take on the risk? It makes no sense.

Ben Felix: It doesn't make sense, in a capitalist society, anyway.

Cameron Passmore: Anyways, that's good for this week.

Ben Felix: All right, so everyone enjoy your holidays. And I hope you enjoyed the episodes that we have coming up and we will be back with new material in the new year.


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