Episode 97: Two Key Principles To Help You Weather A Crazy Stock Market Storm

May 10, 2021

This Episode

Solo Episode

You Will Learn

These charts will help to frame any short-term market hiccups in the context of long term market performance.



There are a lot of great books on long term stock market investing, these are two of my favorites:
Simple Wealth, Inevitable Wealth by Nick Murray (expensive but worth it!)
The Investment Answer by Dan Goldie & Gordon Murray
Or check out my resources page for more good stuff.
If you can get to the simplicity that results from seeing the far side of complexity, you’ve got it made.  🙂

Resources & Links

This week I share two key ideas that will give you critical context for the stock market, and for ultimately achieving a positive outcome for your financial future.  If you don’t know why you’re doing what you’re doing, you won’t be able to “stick to the plan” when things get tough.

Justin (00:00):
Life is a storm. My young friend, you will bask in the sunlight one moment and be shattered on the rocks. The next, what makes you a man is what you do when that storm comes. You must look into the storm and shout, as you did in Rome, do your worst for, I will do mine.

Justin (00:19):
Then the fates will know you as we know you as Al bear. Mandigo the man. A quick disclaimer

Justin (00:52):
For this week’s episode, because I’m going to be talking about investing investment strategies, investment ideas, nothing that is discussed today should be construed as investment advice. I’m not your financial advisor. Please make all investment decisions in conjunction with a qualified professional who is working with you and understands your specific situation and can make recommendations unique to your circumstances. You may have recognized this opening quote from one of my favorite movies, the count of Monte Cristo, where the count offers a birthday toast to young Alabama Mandigo, as he turns 16 years old, the count played by Jim Caviezel is trying to help Al bear to mentally steel himself in advance of the upcoming challenges that life and manhood will inevitably bring. It’s a simple principle of the importance of defiance and strength in the face of extreme hardship. A simple principle that carries a lot more weight coming from the count who was formerly a framed political prisoner locked up for years in an infamous prison.

Justin (01:53):
The Chateau chief, where every year on his birthday, he was beaten. This is a man with credibility in this area. His experience and understanding gives him perspective and allows him to overcome the storms that he, the count faces having walked the walk young Al bear. On the other hand, he may be able to weather whether it life’s storms, but he only, at this point at his birthday party, as he’s turning 16, understands these ideas in vague abstraction. He’s probably nodding and soberly taking in these words, but he has never been really tested and he has no context or perspective for this expectation from the count. So I want to draw a parallel between this real understanding and context that the count has versus the abstract understanding and context of Al bear to try to equip you for a storm that potentially may come inevitably will, if you’re around long enough in the realm of investing judge Oliver, Wendell Holmes Jr was a Supreme court justice for about 30 years.

Justin (03:03):
The proud owner of arguably the most fierce and prodigious mustache ever to grace, the country’s highest bench. He had this phrase that he used that I really liked. And I think encapsulates this idea. I would not give a fig for the simplicity, this side of complexity, but I would give my life for the simplicity on the other side of complexity. So here’s the premise of today’s show a simple system without being informed by context of experience and relevant information becomes increasingly unlikely to deliver a positive outcome. I’ll bear merely by knowing that when the storm rages, he needs to just shake his fist and defiance that’s head knowledge that may not translate into the real world. Whereas the experience of the count has tempered him to be able to withstand a lot in investing the same principle applies a good investing outcome requires yes, that you control only a few key variables.

Justin (04:09):
Someone called this simple, but it is certainly not easy to execute to the point of a positive outcome. So this is going to be in abbreviated episode where I’m going to give you a crash course on getting you to the far side of complexity in some small measure in today’s conversation, as well as providing additional resources, because yes, it’s possible. You can just buy a target year fund or a couple of ETFs. If you want to close your eyes and hope it works, hope that the simple solution without the context and without the understanding will deliver you the outcome that you hope for. And if you stay in your seat the entire time with your seatbelt securely fastened, you might by some luck make it. But if you inform yourself about the concepts and principles, even in a basic way that make up this simple approach and in fact, make it very powerful, you’ll be more likely to look defiantly into the face of a 45% market.

Justin (05:03):
Sell-Off when your portfolio goes from a million down to a number, starting with a five, and you’ll know why you’re doing it. You’ll understand some of the simple mechanisms and understand that the power in those mechanisms is in doing them precisely at the time when the market sell off is happening and you will then be able to see it through. So I want to show you the far side of complexity and give you the tools to push more into that if you want to. And if you want someone to do this for you, obviously I have an enhanced version of this approach, which I use for my clients. And there’s the added benefit when you work with a professional of the ongoing coaching and help with implementation, that accompanies that, but you know this isn’t for everyone. So check this out. If you invest your own money, just two key tenants, the first that if you understand it, and you understand how this has functioned historically, and what it tells us about market cycles.

Justin (05:58):
If you understand this, it will give you a lot of the courage that you need. It’s the idea of mean reversion returning to the mean the longterm average also known as what I call the financial law, the law of financial gravity, what goes up must come down and what goes down in some cases will come back up. Stock markets have long-term trend lines, longterm averages, whenever it returns persist above that line over time, the probability increases for low or negative returns that will bring everything back to the long-term average. And to put this in practical terms, let me give you an example. Imagine you go to a baseball game. It is the home opener for your beloved hometown team. The first batter comes up to the plate last year, this guy hit 11 home runs the year before he hit 13 home runs. This is his first at bat of the season.

Justin (06:55):
First pitch comes in, boom, left field bleachers. It’s a home run. He rounds the basis. Second at bat, boom. I shot into the left center field bleachers. So this guy might still have 500 more bats this season and he’s hit two home runs on the first two at bats of the season. If we reasonably extrapolate this one way would be to say, wow, he’s on pace for 502 home runs. But if we look at a long-term average of 11 home runs and 13 home runs, and the two prior years, we know that in all likelihood, he’s not going to hit five home runs 500 home runs. Maybe you’ve heard the saying trees don’t grow to the sky. It’s the same principle. This guy is probably going to come back down to earth and here’s why this matters. It doesn’t help you timing the stock market, but it can temper your optimism when things are amazing.

Justin (07:44):
Like right now, if you want to see how amazing it is, open up a Google web browser type in I V V that is the S and P 500 ETF market tracker. And look at a one-year view. What you’re going to see is a line that goes from the bottom left hand, part of your screen to the top, right? It’s the chart that every finance person loves to look at. It looks amazing. And right now, March 9th, 2009 is a distant memory, which is the very bottom of the bear market in the late two thousands. And furthermore, even the coronavirus sell off, which was very, very bad. That happened just over a year ago. Many people it’s, it’s sort of escaped your consciousness, but here’s the point in this idea of mean reversion. If you understand the context, you understand what happened in Oh nine, what happened even during the coronavirus pandemic, when things were ratcheting up in the news and the markets sold off between 40 and 50% at that time, the a hundred days following that sell off, starting on around March 22nd, the a hundred days from March 22nd on were literally the best hundred days in the history of the S and P 500.

Justin (08:58):
So you could argue whether or not that’s meaner version, but the point is it was a quick return to the upmarket that had been persisting before that. And if you freaked out and sold all your stock, because you thought the world was going to end, as many people did, some people did, I should say, then that would have a significantly financially detrimental impact. And you would have missed out on the best a hundred day period ever. So understanding this idea of mean reversion when things are awesome. They’re not going to be awesome for forever when things are terrible, as long as capitalism doesn’t break, which is the one tenant that advisor and author, Nick Murray says, he asks his clients, you’ve got to take this on faith. Capitalism is not going to break. It is not going to permanently end. And if it does, frankly, we’ve all got bigger problems than our portfolio.

Justin (09:48):
We’re probably talking about survival, but if capitalism doesn’t end meaner version is going to continue to work and markets are going to continue to deliver something that is going to look hopefully satisfactory in the long run. The second principle that will prepare you for this storm, if by some chance stock markets, don’t continue to go up and up and up and up and up indefinitely is understanding your place in history, having context and understanding how time in the market changes expected return. Last year, I read actually only in part a, a political biography, Henry Kissinger, who was the secretary of state under Nixon and LBJ and a Politico, a globe trotting diplomat. And I it’s, you know, as a, I’m a 34 year old, I have a certain perspective on the world. And you know, when you look at the news and think things are really bad, they are in many ways at times, but Holy cow read a biography of someone in politics in the sixties and seventies, when super powers were stockpiling, nuclear missiles hundreds and hundreds, or even thousands of them and pointing the nukes at each other and tensions are so high.

Justin (11:13):
And it was, you know, at any moment, you know, Wars getting started and it was, we were just a push of the shiny red button away from nuclear apocalypse. You understand where we’ve been historically by familiarizing yourself with some of those circumstances and you have context. Now, when I read the New York times, I can place myself, I can place my current circumstances in historical context. And it helps me to be more emotionally stable, which is really important in investing. This is also true. And as time extends the American economic engine, that is the stock market. As your time period, zooms out the momentum of the stock market, the flexibility in profit generating power, which can be accessed by anyone with an internet connection and an investment account, the outcomes converge in any given day, we don’t know what’s going to happen, but as the time period expands outcomes converge, and as you remain invested over time, the statistical probability of a negative return significantly diminishes in looking at historical returns.

Justin (12:27):
Now I’m going to make the necessary disclaimer, the past doesn’t tell us anything about the future. Pre past performance is not indicated, does not indicate future results, but it gives us a sense of how markets behave, right? When you, what you want to understand is the value of rolling return periods. I’ve talked about this principle on this show, a handful of times in the past, basically the longer you hold a diversified investment, like for example, the S and P 500, the higher, the likelihood of a positive return. If you said at market open today, will it be higher or lower at 4:00 PM at market close? It’s a coin flip it’s, you know, 50 50, whether the market’s going to be up or down today, it’s actually slightly skewed up maybe 55, 45, but as time passes as we zoom out, as we look at a one-year a, three-year a, five-year a 10 year timeframe.

Justin (13:20):
It’s more and more likely that that return is going to be positive over a 20 year time span. There has never been a timeframe when the total return on the S and P 500 has been negative dating till back before the great depression. Now, again, that doesn’t mean that it never will be or could be. And there are other countries that have had economic shocks where that is not true, but this does give us context, historical context to say, even if things are bad, or even if things develop in a direction, we don’t like to say that there’s never been a 20 year period where stocks have gone down, that helps to inform us emotionally and change the way that we think about our investment portfolio and the fact that it’s gone down significantly. Or if we look at a 10 year return and say in all of the rolling 10 year periods from 1926, up through the present 1000 different observation periods of 10 years, 95% of the time they’ve been positive, the S and P 500 has given us a positive return on a five-year timeframe.

Justin (14:32):
That’s about 88%. There’s a really nice chart I’m going to link to in the show notes that that illustrates the point is when you have this historic Oracle context, when you understand the bigger picture and rolling returns over time, over decades, we can place ourselves in the greater narrative. And then it allows us to detach a little bit emotionally because we know we’re just, we’re living out some of this bigger narrative. And yeah, it’s possible that we might have a 20 year bear market, but the fact that it’s literally never happened for as long as we’ve been here and track of this stuff that tells us that at least it’s probably not likely hopefully. And so we hopefully don’t need to be unduly worried. So those are the two principles. The first is understanding mean reversion in the second is understanding historical context in terms of rolling returns.

Justin (15:27):
Right now, there are untold billions of dollars flowing into index funds, which is fine and good, and can be appropriate for some investors. A lot of people think the S and P 500 is the path of the promised land. And again, since 2009, it has been almost an unmitigated March from the bottom left to the top right-hand quadrant. But the laws of financial gravity right now are like a tightening rubber band where even in the last year in the last three years, we’ve just seen really above average returns and financial gravity. The laws are that they may kick in at any moment. And I worry that people that have a blind investment approach who take simplicity on the near side of complexity, rather than simplicity on the far side of complexity may not be equipped to handle whenever the music stops. And we see, you know, six month, one year, 18 month recession.

Justin (16:27):
If you take a simple approach without understanding enough of the rationale without appreciating the elegance of an investment solution in the context of the broader circumstances, then you’re not going to get the positive outcome. There’s going to be a storm, whether it’s tomorrow, next year, three years from now, there are unprecedented things happening right now in the economy. That’s a whole nother conversation. The point is if you press into these key principles, just a couple of them, and you have an elegant investment solution, which keeps costs low, which rebalances, which remains pointed in a consistent direction, which you add to over time where you return to your strategic asset allocation as months pass. That is going to be a very powerful mechanism for building wealth over multiple economic cycles. Check out the show notes this week, anesthesia success.com/ 97. I’ll put a few of my favorite resources up at the top, which are geared to help inform retail investors of these complexities just enough, hopefully that it will.

Justin (17:30):
First of all, it’s a starting point. That’s all it is, is a starting point to begin to enlighten you as to some of the complexities that exist in the investment world. So that if you have an elegant and simple solution, then you will be able to have the result to stay with the storm in the face. And, and whether it, because you know, the historical context of the investment approach that you’re taking don’t get me wrong. I think that more than 90% of doctors probably should work with a financial professional to help them implement this in some capacity. But if you’re part of the 10% out there, let this resource augment your certainty and hopefully enhance your outcome. Or if you want to know what your advisor right now is already hopefully doing with, and for you, these resources can help. If you’re interested in working with an advisor who implement these strategies, you can go to apm-wealth.com to schedule an intro call with yours, truly as always attention. The attention that you offer this show every week is such a valuable currency. I don’t take it for granted that you decided to listen to me for these last handful of minutes.

Justin (18:39):
Thank you for tuning in to this episode of APM success. If you liked what you heard this week, I don’t over to APM success.com, where you can find more content and free resources to help you build a successful career in anesthesia and pain management. If you want it to leave a review in iTunes, that also really appreciate it. Thanks for using some of your valuable time to join me today on APM success.