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The hardest investment

March 11, 2010

One year ago, Rocky was diligently “dollar cost averaging” in stocks, corporate bonds and other “risky” assets.
See: https://onehonestman.wordpress.com/2009/03/05/sp-500-target-price-zero-on-11109/
It was painful at the time, yet his models, reason and experience suggested an extremely high probability of double-digit returns over the ensuing five years. (Rocky neither predicted nor expected a 70% rally in only twelve months.)

After this historic rally, Rocky’s estimate for stock market returns over the next five years is back towards the low single digits. What’s Rocky doing? He’s not betting that the stock market will decline, but instead, he’s pruning back some exposure (with long term capital gains tax treatment) and building his cash balances. The most difficult investment today: cash yielding zero.

Rocky’s a terrible market predictor and he readily acknowledges that the stock market could easily rise another 10% over the next six months. However, Rocky notes that the most difficult investment is often the best investment. And that painful investment is now “cash.”

[Disclosure: Rocky doesn’t provides investment advice. He always buys early, sells early, and goes to bed early.]

  1. reallyfatbear
    March 11, 2010 at 3:56 pm

    Does Rocky not remember that he predicted to us all that the market would reach -0- on November 1, 2009? In the very posting he refers to above?

    So, a responsible disclosure would be that while past performance is no indication of future profits, in Rocky’s case past performance would include an infinite loss (the percentage gain from -0- to today’s close is infinity).

    On the off chance that Rocky seeks the “safe harbor” of satire, does he not realize that an accountant is an auditor with a sense of humor?

  2. March 11, 2010 at 4:07 pm

    ReallyFATbear: After seeing the movie Avatar, Rocky’s accountant traded his green eyeshade for red&blue 3-D glasses. That put everything in focus.

  3. reallyfatbear
    March 11, 2010 at 4:30 pm

    I do hope that Rocky means polarized and/or shutter glasses, as otherwise his accountant would see the N’avi as alternating white (blue lens) and black (red lens), depending on which eye he had open. My accountant has always preferred gray…. (or Zane Grey if you will)

  4. kim
    March 11, 2010 at 5:31 pm


    I think Rocky was pointing out what would happen had the trend in stocks late 2009 continued, had we not been saved! Similarly, if the market goes up 70% a year from here, in 20 years your $1000 investment will become $40,642,314.07 (neglecting inflation)

    Even though Rocky says he’s not very good at predicting the market, he did buy low and sell higher. You might call getting that only half right a “half Rocky”

  5. March 11, 2010 at 6:30 pm

    Kim: Better a half-rocky than a half-Nelson.

    Fatbear: seriously for a second, read the comments on that post from March 2008….

  6. kim
    March 12, 2010 at 9:01 pm

    Today my brokerage informed me that cash was yielding 0.01% per year. He denied that was a telephone typo, and I congratulated him on the good job the Fed had done herding people out of cash.

    However it’s possible that as long as people are more concerned about return of their money than return on their money, the market will rise.


  7. ld
    March 14, 2010 at 6:25 pm

    The question is how much to allocate to that “terrible” investment – 10%, 23.6%, 80% and for how long? And, how does one figure this out? It is impossible to disagree with what Rocky said in the post and he was RIGHT in the referenced post too.

  8. der Tillman
    March 18, 2010 at 10:03 am

    Cash has been at these yields for at least 6 months now and depending on what you look at, close to a year. from this perspective it has been difficult to own for some time. Nonetheless, I agree that equities have become psychologically ‘easier’ to own than cash.

    but rather than just agreeing, i have to ask the devil’s advocate question: isn’t moving to cash based on this argument that it is the hardest thing to do, simply a confirmation bias of your model’s conclusion? I mean, if money markets have been at these painful levels for a while, why is it now suddenly time to move into the ‘hardest investment’ (other than what your models are telling you)?

    I hope the tone of this question isn’t offensive or abrasive. I actually agree with what you are saying, just trying not to be a yes man. You definitely have me thinking.


  9. March 18, 2010 at 10:45 am

    Hi tyler: Welcome to Rocky’s blog — and thanks very much for your provocative question. Regarding the tone of your comment and your use of the term “abrasive,” unless the discussion is about toilet paper, abrasiveness is not a concern.

    Some thoughts:
    1) What are the relative attractions and risks of different investments? If one believes that over the next several years, stocks will return 10-15% (compounded), than one should allocate assets differently than if one believes that stocks will return 4%-8% over the next several years. The single most important determinant to one’s future stock returns is the entry point. Similarly, the single most important determinant to one’s future bond returns is the current yield.

    2) More often than not, trends persist longer and go further than reasonable people expect. This means that, in the short-term, stocks may continue to rise further than one might expect, and, cash yields may stay lower longer than reasonable people expect. However, this is a trading/speculative point — because if you have a multi-year horizon, the points alluded to in #1 are more important in the creation of sustainable, longterm wealth. That is, buying quality assets at good to great prices will dwarf everything else…over time.

    3) One way that monetary policy works is by making cash holding painful — and making other investments more attractive relatively. And this point addresses your observation about pain. If cash were yielding 5% right now, it sounds like you would be less inclined to own stocks and more inclined to own cash. But that’s not the whole picture, since if the stock market is incredibly attractive, the 5% on cash might not be attractive either. Additionally, there is a market psychology aspect to defining pain — and it’s associated with panic, fear, etc…all of which are outside the realm of models for valuation and expected return.

    Arguably, the single most important thing to avoid is hubris. Noone knows what the future will hold, and Rocky believes that there is an important difference between speculation and investment. Rocky is not bearish on stocks — he’s just less bullish. Yet, if stocks rise another 60% in the next twelve months, he will be bearish on them. Betting that they will rise another 60% is a speculation. Owning much fewer stocks after they’ve risen another 60% is prudent investing.

  10. der Tillman
    March 18, 2010 at 11:47 am

    thank you very much for your thoughtful response. I have nothing to add.

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