Notes from JL Collins on the market crash (Mad Fientist podcast)

After nearly a decade, the much awaited bear market is on us. It didn’t arrive in any form or shape that anyone would have liked or predicted, but that’s how regimes change in the equity markets. I plan to write up my thoughts soon, but in the meantime, I wanted to share this excellent podcast interview of JL Collins on the Mad Fientist.

Link to Podcast: here.

My notes from this podcast:

1. Every bear market is unique. By definition, every time there’s a bear market, it feels different. If it turns out to be the end of civilization, we will have more things to worry about than our investments. If you didn’t have uncertainty or a scary thing you would not have a bear market. It’s the definition.

2. Corona virus won’t be as bad as the black plague. We understand a lot more about hygeine and germ theory than they did in 1300s.

3. Imagine you own a hotel by the beach and there’s a giant hurricane coming. You will perhaps temporarily close the hotel, maybe you are forced to lay off some employees, but you’re not going to sell it just because the outlook over the next few months is negative.

4. We are compensated with higher returns in stocks exactly because of times like this. If the stock market was always smooth sailing, then we shouldn’t get paid much more than safe investments like bonds should give us.

5. Going back to the hotel example, If you want to own a business like that you need to be prepared to withstand the occasional hurricane. If you’re not prepared, you will suffer. The time to prepare is not in the middle of the hurricane but it is when there is calm on the horizon. If you’re going to invest in stocks, you need to understand that bear markets are part of the landscape. You shouldn’t be any more surprised by them then you should be by blizzards in northern New England.

6. Based on the comments JL Collins is getting on his blog, he estimates that about 2/3 of his commenters have understood this need to prepare. They are sleeping well. The remaining 1/3 of his readers are panicking and he feels that they did not understand themselves and their risk tolerances.

7. In 1987, on Black Monday, the market fell over 23%. It still remains the biggest in history. While Collins was invested, he didn’t realize it fell until a casual evening conversation with his broker that he initiated purely by chance. The flow of news from then to today is just worlds apart.

8. After that market drop in 1987, the market continue to grind down slowly over time. Despite knowing that he should stay the course, JL Collins couldn’t control his nerve and got out close to the bottom. The market then began its relentless right up and he kept watching, it kept expecting things to fall and of course that never happened. He finally got back in much later at higher price. That lesson is what sustained Jim Collins in 2007-2008.

9. The host of the podcast, Brandon, had some excess cash in 2007 due to sale of his house. He kept buying but the market kept tanking and he would buy less and less each time. He could never fully deploy his cash. As a result, he now really believes in the power of systems.

10. If you are in the wealth accumulation phase, and are spending less than you earn, a bear market like this is a huge gift. Such people should keep investing as aggressively as they can.

11. If you are in the wealth preservation stage, that’s the time to introduce bonds in the portfolio – in order to smooth the ride at times like this by rebalancing annually.

12. Ideally you would have done self reflection during calm and figured out how much in stocks works for you. But if you haven’t this is a good time to learn about your behavior.

13. The bear markets almost always happen rapidly. There’s a saying on Wall Street, “stocks take the stairs up and take the elevator down”.

14. You cannot predict the bottom. The last two days of last week (2020 March 9-13) are a perfect example of that. The market had its worst day since 1987 followed by one of its best days right after.

15. Anyone who thinks they know what’s going to happen to stock prices in short term doesn’t know what they don’t know.

16. Going back to the hotel on the beach analogy, there is always a concern about how long an event will last and whether there will be sufficient cash for the hotel. That’s precisely the reason one needs to be diversified across sectors and companies by owning broad-based index funds. Some companies will fold while others emerge stronger.

17. Bear markets are a necessity for a healthy economy - it provides a way for weak companies to fold, and strong companies to emerge stronger. It separates the wheat from the chaff.

18. Jim Collins talks about his blog post called the time machine

    The market returned 12% on average over the 40 years from 1975 till 2017 (time of the post). However, that time period only seems like a golden period to invest in hindsight. In realtime, it was filled with uncertainty, wars, inflation, black Monday, etc. That return was in spite of that uncertainty.

19. The time to figure out your plan is when things are calm, not right now. For anyone concerned or worried right now, don’t do anything. Do nothing until this storm passes and then figure out what your plan is.

Bear markets are the best time to learn about oneself and one’s behavior.