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 Canaccord Genuity Corp.

Why I'll Never Sell to Cash

Markus Muhs - Dec 20, 2021
I remember the first time I traded a stock on my own being sometime in mid-2002. I did already hold some mutual funds prior, but I consider 2002—when I was 21—to be when I started to get active and get interested in investing for myself. 
 
For the longest time I considered myself among the younger ranks of advisors, but I guess with 20 years of personal investing experience and 15 years of professional experience I can now consider myself a wise old sage. I’m just a few decades short on Buffett!
 
My two decades of experience started in the depths of the post-tech bubble, post-9/11 era, included the Great Financial Crisis (GFC), European debt crisis, multiple commodity price crashes, the great flash crash of 2010, taper tantrums, earnings recessions, yield curve inversions, a global health pandemic, and now fears about inflation. If there’s one key thing I learned through all of it, that can universally make every other investor better off in the long run if they heed this advice, it’s to never sell to cash. 
 
Throughout all of the above I never sold to cash myself, and admittedly have made some major screw-ups betting in the other direction. In September 2008, with markets down over 20% from their highs and expecting a turnaround, my first ever ETF purchases were into some “bull” ETFs double-leveraged into Canadian and U.S. stocks. Markets continued down another 20-30% and I learned the hard way how leveraged ETFs grind away at your principal over time
 
As an advisor though, I’ve had plenty of experience knowing clients and prospective clients who sold to cash, in particular around that very scary 2008-2009 crash. The worst of it happened right in that first week of March 2009, when things were at their absolute darkest (the S&P 500, which was at over 1500 in 2007 had dipped to below 700 at that time).
 
A sell at the lows of early-2009, which only happened out of pure panic, has to have been the most costly investment mistake anyone could have ever made in their lifetime. I don’t think I have to do the math for you, given that the S&P 500 is now in the 4000s (more than 6x above the lows!).
 
I have known people too who timed it right. They sold everything in the first half of 2008, when the TSX was actually at all-time highs (approaching 15,000) and the S&P500 wasn’t down that much yet (in the 1300s). I strongly cautioned one client against it and told her she was making a mistake. Turns out she was right… at least for a while. Lost track of her though, and she never got back into the markets as far as I know; unless it was at higher levels than she sold at.
 
At one point post-crash, perhaps mid-2009, the bank I was at referred a prospective client my way who had everything in cash in their RRSPs and other investment accounts. They told me they had a “feeling” in 2008 and sold everything. I stopped short of high-fiving them across my desk, but congratulated them and told them that’s great; now they can buy back in at much lower levels. They disagreed. Their intuition told them there was “another shoe to drop” or something like that. I never heard back from them, so again I don’t know if they ever took advantage of their great timing luck and got back in.
 
The biggest challenge after selling—whether you timed the sale correctly or not—is getting back in. I mean this is textbook stuff, but here’s my actual real-world experience: you can time a market exit right, or you can time it wrong. Call it 50/50 odds on getting that right. You will almost never time a re-entry into the markets right. I won’t even give the most astute and informed investor 50/50 odds on that.
 
You either got out of the markets at the wrong time, because of panic fear, and still have the same fears keeping you out. Or you’re a genius and you got out at the right time, because of your genius intuition, but that same intuition keeps you out of the markets at the lows. You then see the market lows disappear, new highs get breached, and by then you're filled with too much regret to get back in. Just waiting for "the other shoe to drop", sending the markets tumbling again, but it doesn't happen (or happens from much higher levels, crashing down to still higher levels).
 
What did Warren Buffett say? He has a couple quotes where the thesis is that any IQ points above 120-130 are only a detriment to the investor. Kind of reminds me of this meme early in on the market recovery:
 
 
 
Over the past 20 years I also learned that market direction rarely makes any sense and is usually completely unpredictable. If there are reasons to fear the markets will go down, those fears are usually baked into prices and markets will start a rally when you least expect them to. When all the news is optimistic, this too is baked into market prices and something completely unpredictable (like a pandemic) will come out of left field and send the markets plummeting. 
 
Just face it: you can’t ever predict the markets. I can’t predict the markets. Talking heads on TV can’t predict the markets. Fundamentals won’t predict the markets. Analyzing lines in a chart (technical analysis) won’t predict the markets.
 
The only thing we do know, from history, is that the markets are worth A LOT more today than they were in the past. They’ve done a phenomenal job of growing our wealth over the long-term. The Dow Jones (using a market indicator that isn’t a real index, but has a lot of long-term history, which you can find here) is today at around 35K. 
 
The DJIA dipped to 7000 at the depths of the GFC, was around 14K in the peak leading up to it. It hit levels over 11K during the tech bubble peaks and was around 7000-8000 when I started investing 20 years ago. 
 
(source: Wikipedia)
 
 
The DJIA peaked at over 2700 prior to the 1987 crash, and then dipped below 1800.
 
The week before I was born the DJIA was on the decline, with fears of an “increasing inflationary spiral”, ending the Friday session at 940.19. This article from the Saturday paper on the day I was born has all sorts of very interesting facts and figures about the markets that week, which I’m sure were of interest to Wall Street traders at that time but had absolutely zero relevance in the graph above, which happened just less than seven years later. Per the article, the inflation figure for 1980 just came in at 12.4%; the second year in a row of double-digit inflation. Investor confidence was eroding and some smart VP at a wealth management firm predicted that the DJIA “should continue to weaken over the near-term.”
 
Looking back at the above graph: if you bought the DJIA on the Monday following my birth, in the 940s, after reading the dire outlook in the newspapers that weekend, and then whoops sold it at the lows on the day of the worst single-day market crash in U.S. history, just less than 7 years later... you almost doubled your money.
 
And of course, if you had the misfortune of buying into the markets the day before the 1987 crash, then again had the misfortune of selling at the bear market lows around 2002, you still roughly tripled your money.
 
Ultimately what does it all matter? What do the news headlines of today matter when you’re investing for a future more than 10 years away? What do today’s market direction and sentiment (both of which will change on a dime, randomly in probably a few days or weeks) matter?
 
Ben Carlson, of A Wealth of Common Sense, did a great explainer video on what the investment experience would have been for someone who never exited the market, but always had the absolute worst luck entering it; always entering at the highs. This should pretty much put the nail in the coffin, for the notion of market-timing, to any rational long-term investor:
 
 
The most recent bear market, in March 2020, took it to another level. No one in January 2020—when everything was going right for the economy and the markets—could have predicted what would happen. Fundamentals looked great. Charts looked great. Then we crashed. From that point forward, no one could have predicted exactly when the low would be. Less predictable than all that even was that we would again be approaching all time highs less than three months later.
 
Again, using the most recent example: fear might have driven an investor to cash any time from late-February (when things started to get scary and we were already down over 20%) all the way through March (when the markets were opening to multiple circuit breakers some mornings). When would that fear have abated to the point the investor might have re-invested? Certainly not prior to the new all time highs in September. To date, the pandemic hasn’t gone away and only new fears abound (Omicron).
 
Brilliant intuition might have been to sell sometime in January, or the first half of February, as cases started piling up in China and parts of Europe and some corners of North America. That is, if you knew this thing was far more serious than Swine Flu or SARS-1. But then when would you have gotten back in? Probably not at March lows, when things only looked like they were getting worse. Not in spring/summer as the virus stubbornly wouldn’t go away after “2 weeks to flatten the curve” and a 2nd wave starting up in the U.S. If not before the return to all-time highs in September, then maybe at the lows of late-October? Maybe wait till after the U.S. election?
 
Bottom line of all of this is that no good can come of it. If you stay inert and don’t sell to cash ever, then you’ll ride the rollercoaster in the short-term, and the up escalator in the long-term. If you try to market-time you will experience only rollercoasters and have a good chance of missing the escalator altogether.

I’ll leave you with one last experience from my past at the bank. This one almost makes me cry and shows really how damaging market timing decisions can be in the very long-term. Keep in mind the numbers for the Dow Jones I mentioned above; in the early-1980s it was at around 1000; today it’s 35x that, and in 2010 it was 10x: 
 
In 2010, the bank branch I was at referred to me a little old couple. Must have been 90ish. They were 100% in GICs and really weren’t right for my service, but the branch put everyone with over $100K at the bank in front of me. They had very little investment experience and had almost always been entirely in GICs (which did fine for them in the 1980s, 1990s, and even most of the 2000s). In discussing their past investment experience, they told me that they did try investing in stocks in the early-1980s. 
 
“You must have done awesome!” I said, or something along those lines.
 
“No,” they told me, “the markets went down, so we went back to GICs and never looked back.” Again, I’m paraphrasing.
 
Just imagine the amount of wealth they could have built up through the greatest bull market there ever was, through the 1980s and 1990s! All ruined by a timing decision.
 
Further reading: When the markets crash again—when they really crash (note: it's not an if)—have my First Aid Kit for Volatile Markets boomarked to refer to, to help you make sense of the situation and keep you focused on your long-term goals.

 
Senior Investment Advisor & Portfolio Manager
 
 
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Cover photo via Unsplash