Will your team win?
A Story the Super Bowl Can Teach All Investors
As a lifelong athlete and a huge fan of competitive sports, I can’t help but think of professional football as a backdrop to this newsletter in early 2023. Even if football isn’t your thing, what I am about to share has lots in common with what’s going on in the economy and in the markets these days.
I’m going to preface this newsletter by saying that I am going to be straight with you. Not that I am not always direct, but today I am going to be particularly direct. I have been hearing from some folks who – not even a quarter into the New Year – are grumbling that 2023 is just going to be another challenging year, after all the challenging years we have had recently, and that we can and should only expect more of the same.
In the past year – make that the past three or four years – really since the pandemic started, we have all been faced with so many unforeseeable events that we can point to as sources of negativity. It has indeed been a chaotic few years. In times like these, it gets easy for us to get in the habit of seeing everything that happens in a negative light.
A Defeatist Attitude Inevitably Leads To Defeat
I remember, back when I was playing competitive team sports, there was this phenomenon that when you were down and lost a few games in a row, you became susceptible to learning how to lose. Once we were on a losing streak, it was easy to fall victim to the expectation that we would lose. We might even have played well for the first three quarters of the game, but in the last quarter, something would happen that always got in the way of us winning. It wasn’t our intention to lose, if we were not careful it just became our mentality, and somehow that always led to losing.
This same attitude, translated to the state of the economy, about the markets, about life itself, is not only defeatist but also limited in perspective. It’s immaterial and irrelevant. It’s no different than the sports team that steps onto the field, hoping to win, but never quite believes that it can happen. Consequently, they play like a team that can’t and won’t win, and they don’t. It’s self-fulfilling. This kind of thinking is unproductive, it has no room for opportunity, and quite frankly, it’s boring.
This brings to mind a memory of Super Bowl LI (51) where the New England Patriots faced the Atlanta Falcons at NRG Stadium in Houston in 2017. With a little more than one quarter left to play, Tom Brady and the Patriots were facing a 25-point deficit against the pretty remarkable Falcons. Being down 25 points with so much at stake, the general feeling was that surely only a miracle would allow the Patriots any chance of coming back, let alone of winning the game.
Successful Investors Don’t Believe In Miracles
That assumption, however, proved to be wrong. There were no trick plays. There were no “immaculate receptions.” Doug Flutie was not summoned out of retirement to throw a 50-plus yard Hail Mary. None of that happened. What did happen was “simply” a refocusing on the execution of the game plan and strategy by the Patriots. Little by little, they chipped away at the lead and continued to execute over the rest of the game, and put themselves in a position to win, which they did in overtime.
Perhaps you don’t remember this. Maybe you shut off your TV. Maybe by the end of the third quarter, or even before that, you were overcome with frustration with the Patriots’ performance and you just got bored, tired, or gave up on them.
This game was the culmination of an extremely successful season for the Patriots. And then within the first few quarters of the game, at the pinnacle of an incredible year for them, all was seemingly lost. For many fans, it felt like there was no point in watching anymore. It felt like someone had let the air out of the entire Super Bowl. Everything was riding on this one game. The Patriots were favored. Brady was at the top of his game, and he had a great team around him. There was no reason they wouldn’t be able to come back – it was, after all, the same team that had won so many times before. But some Pats fans were discouraged by how things were going. They were upset, disappointed, and had thrown in the towel. All this based on three quarters of the game, which isn’t even the full game.
When Do You Give Up On Your Team?
What did you do? (What would you do?) Did you keep watching, or did you leave? Regardless of whether the Pats are your team or not – to not want to watch your team lose, to disengage, to switch the channel, to pack up the kids and go home from that Super Bowl party, to go get the car to “beat traffic,” all this is entirely a human response. It’s an emotional and understandable response.
But for those of us who stayed and watched, we witnessed the shift that happened from the end of the third quarter. Things started to work again for the Patriots. Now they didn’t make up their 25-point deficit in one swoop. You know as well as I do, there is such thing as a 25-point play. And that’s how much they had to gain to win the game. But they did it, point by point. Until they finally won, long after most folks had tuned out and gone to sleep.
Speaking of games that look like they’re stuck in a losing streak, this is a good time to bring your attention to the markets and the economy today. And my question to you, as it relates to finance is, of all the most terrible bear markets the US has ever seen, prior to 2022 how many of those bear markets eventually recovered? Was it 10% of them? 50%? Was it 70%? What do you think?
It is one hundred percent of them.
Predictions Are Dangerous to Your (Emotional and Financial) Health
Every single one of the bear markets we have experienced to date has recovered. Since 1980 that has been, by my count, eight bear markets. Since 1928, there have been something like 27 bear markets. Not only have 100% of all bear markets that we have experienced since the beginning of the stock market fully recovered, but those markets have also gone on to higher highs. This is where my patience runs out with people who say that, “My brother-in-law says that we’re in for a terrible 2023,” or “My super successful friend who works for such and such company says we’re headed into a deep recession,” or that they heard yet another prediction on cable news about all the things that will go wrong with the economy. What I want to ask these people is, “Might have that been the same friend or brother-in-law or TV personality who was touting their success in the crypto markets and how you were missing out?” And how are those crypto holdings doing for those folks now?
Look, I can’t tell you anything about the future, because there are no facts about the future. But I do know that if we go examine all the bear markets throughout history, despite the backdrop of extreme negativity, all of them have recovered. I say extreme negativity, because every bear market comes with extreme negativity, even though there are different economic conditions or contagions that plague the economy at that point in time. While the contagions turn out to be different every time, the times themselves aren’t significantly different at all from each other.
And this one ain’t different either.
In times like these, it seems like everyone turns into a market prognosticator. Why is it that when we are going through tough times, suddenly everybody turns into an expert about what will happen in the future?
The truth is that great companies, like great teams, and like the great human beings that make up those teams, are capable of recovery. This is what we all do as human beings: we struggle, we fail, we change, we innovate, and we find new paths forward. We identify (or create!) new opportunities. We go through short-term pain and rise to a higher level of understanding and achievement. We are indeed capable of accomplishments that we never thought would be possible in our lifetimes.
Sometimes You Just Gotta Step Back A Little
When I got into the business in 2004, the Dow Jones was trading at just over 10,000. I remember my mentor, David Mallach, mentioning to me numerous times that before we know it will go to 11,000, then 15,000, then 20,000, and one day you will look up and it will be at 30,000. People will be remarking that the market is at an ‘all-time high,’ and that it couldn’t possibly go any higher. And then it does. Of course, along the way we experience lots of volatility. There are corrections and drops that shake people up a bit, but those are temporary. And then it just moves higher. That's the way of the world, it’s the picture of the economy and the markets if you stand back far enough to see it.
At the time of this writing, the Dow is hovering right around 33,000. At the center of the (financial) drama this year is the Federal Reserve and its very aggressive efforts to bring inflation under control. We have called inflation a cancer before in this column, and it requires aggressive rate hikes to combat its spread. What happened when the Fed acted? The markets reacted to the interest rate hikes. At one point in 2022, the S&P was down something like 27%. Bond prices also reacted negatively to higher interest rates, and they were down substantially as well.
And It Also Helps to Tune Out The Noise
What validates our investment strategy, is the fact that over the last three years, by following our own advice, by tuning out all the disruptions and the noise, by continuing to work on the long-term plan versus reacting to short-term market conditions, we have in fact been able to hold pretty steady. When the pandemic struck in early 2020, the S&P fell around 38%. If you go back to 2018, at the end of the year we faced a very near bear market. Even though we have been through a few bear markets between 2018 and today, asset prices in our Strategies, the equity markets as a whole have arguably held up quite nicely. This is because we follow a methodology that can stand on its own, outside of the turbulence of the marketplace.
The burning question for many folks today is, to what lengths will the Federal Reserve go to stamp out this inflation? Might it tip the economy into a recession at some point, if it already hasn't done so? And then if it does, what does that mean for the markets or for your portfolio? Remember, a recession is a backward-looking indicator – it’s two consecutive quarters of declining economic activity. You won’t know it until you’re in it.
Don’t Ask: “Are We In A Recession?”
The burning question for us is not “Are we in a recession, and what does it mean for my portfolio?” No, the question I invite you to consider is, “Does it really matter?” Given all that is unknown and unknowable, how can anyone make a rational recommendation about what is to come? One thing I know with certainty, however, is that fighting inflation is not only the most important thing going on right now, but also as I've articulated to many of you as clients, it is well worth it. We will take the short-term pain of interest rate hikes, and all they bring – today, this quarter, this year, knowing that we need to destroy the terrible effects of the cancer that is inflation. Because it is inflation that is eroding your long-term financial outcome.
And we also know that the only way to combat inflation is to remain invested in successful companies. Our portfolios hold companies that are successful, resourceful, and like the Patriots in the story I shared with you, the great majority of these companies will endure because they will continue to execute a well-thought-out game plan. Will they be challenged? Sure. Maybe they will lay off some folks, maybe they'll discontinue a product line, maybe they'll change course and take the business in another direction. Businesses right now are refining their strategies. They're looking for opportunities. They're looking to meet the needs and wants of all of us. When it comes to our Strategies, we strive to identify these great companies every single day; we will continue to hold these companies until the moment we feel they are unable to adapt and grow, at which point we will replace them with companies we feel are great companies getting better.
Remember, we – our clients and all of us here at Beck Bode - are planning-driven equity investors with a long-term focus. Our success financially comes from continuously acting on a plan. We know that substandard returns and investment failure come from reacting to current events. We believe that the most reliable way to capture the full premium that equities offer is to ride out their frequent and historically temporary declines. It is a principle we forever stand on.
Panic Is Not A Strategy
In closing, I want to bring us back to the story about football. I remember watching that Patriots game and wanting them to win. Maybe my reaction is a little different, or maybe this is how you felt. But in the third quarter, when the Patriots were in a tight spot, I was also filled with a level of excitement, like “Wow, what if they do pull this off?” And the best part of all this is that it didn’t take a miracle. They didn't get lucky. They just executed during a time when it was a little bit tougher to execute. They called some audibles here and there, they went in a direction or two. But what they didn't do is panic. They didn't throw out the game plan. That's just not what great teams do. The coach designs a game plan, and you stick to it. They stuck to it, and they executed it even better.
The markets are no different. Your portfolio and your financial future are not different. I’m not sitting here telling you to sit back and relax and “everything will always be OK.” No, I am asking you to stay engaged in your life, stay engaged in your investments, and don’t leave the game. Because the rest of the game is not 2023. The rest of the game is however many years you are alive. And don’t forget your children’s lives after that. This is a long game we are in.
The Long Game We Are In
My message to you is to stay at the game. Good things will eventually happen. If it’s not a football game, but your portfolio that we are talking about, imagine what it would be like if you went to the sideline or headed to the parking lot, perhaps you went home and checked out. But then your team wins and you’re not there for it.
Because here’s the thing. Historically speaking, your team always wins. Historically speaking, the markets have recovered from every single bear market. It may have taken some time; it hasn’t always happened quickly or without pain. So don’t go home and cover yourself up and go to sleep.
Your team always wins.
Ben Beck, CFP®
Ben Beck is Managing Partner & Chief Investment Officer at Beck Bode, a deliberately different wealth management firm with a unique view on investing, business and life.