Just like in the movie The Big Short, while at Bear Stearns, I saw the signs of a looming crash and got out in time. In order to save our clients’ life savings we sold everything we could for anyone who’d let us in May 2007. We survived the crash with 17 percent losses and even thrived with 24 accounts positive. Because we had such strong convictions that the crash was coming, we were fortunate to get out near the top instead of adhering to the conventional wisdom to “ride it out.” (If you haven’t read the story, please do so!)

So, what did we learn when the subprime hit the fan?

1. The proclamations of the rich and famous aren’t always true.

Exhibit A: Jim Cayne assuring us that Bear Stearns was in good shape. Exhibits B-D: the $3.3 trillion in home equity lost to US homeowners in 2008; the one in six homeowners underwater on their mortgages at that time; and the $6.9 trillion in shareholder wealth that went up in flames in 2008¹. Staying in the market is not always the most prudent option.

2. Information is cherry-picked…

It’s all about “time in the market” not “timing the market.” If you get out, for example, you might miss the 50 best days. Your returns go from 10 percent to 2 percent. That’s significant; that’s the difference between a comfortable retirement and scrimping to get by, right?

But what they don’t tell you is what happens if you miss the 50 worst days. Those 10 percent returns can grow up to 20 percent. The data we see is often carefully selected to shore up marketing claims; we’re not getting the whole story.

Another half-truth we hear: 85% of fund managers don't outperform the market. This means you can’t. Don’t try; just buckle in for the ride. But wait. If 85 percent don’t, 15 percent do. There are 10,000 mutual funds out there — and 1500 manage to defy conventional wisdom.

3. … to scare you into complacency.

If you think “scare tactic” is too strong a word, think back to the days, months, and years leading to the crash of 2007. There were warning signs and deep unease, but the voices of reason told investors: “Stay in. The market will correct itself. You can’t time it; you’ll do far more harm than good.”

You can potentially miss some of the worst 50. We did. Moving money in and out of the market is not only rational, it’s an act of wealth-preservation.

In the aftermath of the crash, I started studying. What if we could, in fact, “time the market” or more aptly named protect assets and get out nearer the top? Buy low, sell high, right? Looking at historical data, I noticed that when the stock market and the 50-day moving average drop below the 200-day (called, a bit dramatically, a “death cross”), it can stay below that for a long time. It’s an indicator that you could lose 2 - 3% — or 50 - 90%. No market can crash without that happening. So why not get out at this point?

It doesn’t work. If you get out for every death cross, you just don’t have more money. All right: score one for the voices of reason telling you to stay in.

Then I realized that this is just the first indicator. The second is some percentage below market peaks that tells you where corrections stop and crashes begin. Again, through historical data, we found that that was between 16 - 19%.

If you move out of the market at those points? You had 181 - 262% more money than staying in. And that’s true over the entire history of the market. A little rich for your blood? Well, if you take half your money out and keep half in, you historically had 2 times more money than if you stayed in. Score 100-262% for the rational voice that tells you to get the hell out.

4. Conventional Wisdom = Asset Russian Roulette

Buy and hold. The market ALWAYS comes back. You can’t time the market.



Proclamations of the rich and famous aren’t always true: Exhibit E. These pieces of conventional wisdom are built on a foundation of assumptions – and even, at times, lies:

It may not come back. The market usually comes back in a timely fashion – like it has in 8 of the top 11 worst crashes in history.

What is good for everyone (read: young people) is good for you. Will the market come back in your lifetime, or in time to fund a comfortable retirement? In 2008, the market dropped for two years and recovered within five. In 1929, the downward spiral continued for 4 years. The market didn’t recover for 25 years. Many died before it came back.

The crash is over; we can move on. What this adage ignores is that stock market crashes can cluster – for decades. You might, for example, have eight crashes in a period of 50 years. With 2000 and 2008 under our belts, that could mean there are six more coming in the next 33 years.

If all of these “truths” are shown for what they are – half-baked assumptions – do you really think your wealth will survive the buy-and-hold strategy from the 1970s 80s and 90s? It’s like playing Russian Roulette with your money. When you’re counting on those funds to see you through the golden years, that’s a risk you do not want to take. It’s a risk you might not need to take if you run two strategies simultaneously (i.e. keeping half your money in and moving half out, as explained above or having a sell high mindset).

You could argue, “Well, Craig, the market did come back.” This time. Are you 100% certain it will next time? Go ahead; pull the trigger. I’m 100% certain one of those bullets can kill you. That’s how I think of risk management; that’s how Squire is different. And that’s why everyone willing to trade conventional fallacies with unconventional wisdom should have a significant portion of their real money with Squire AM.

The Bottom Line

Investment always involves risk and the uncertainty of returns. Always. But you want to work with an asset manager who knows some of the unknowns, who can use sound, complete data, careful analysis, and unconventional wisdom to help you make the most of money. Not just someone who spouts marketing pieces from people or money managing firms who only get paid if you stay invested in their funds. You need someone who will lean in and say, “Smell that? It’s smoke, and we need to get out.”

Footnotes

1. http://www.businessinsider.com/2009/2/america-lost-102-trillion-of-wealth-in-2008

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