Hmm...I think I know what spawned this thought-provoking post!
Question - if you had held SPY with your cash holdings since you started tracking your performance, would your overall returns be better or worse? If Berkshire historically held SPY with their cash holdings would they have done better or worse? Every day you hold cash instead of a market tracking ETF like SPY you are implicitly betting that the cash will outperform the market. That sounds like market timing to me. Unlike Berkshire, who, given their size, might have a little more difficulty converting ETF holdings into cash to take advantage of great opportunities, and thus puts an option value on cash, you can always easily sell the ETF quickly to invest in a great opportunity if it comes along. Plus I think they would freely admit they are implicitly timing the market. Last, does the fed showing that it is willing to inject liquidity quickly and massively change things?
Heh, ya I think this post was spurred by our recent conversation, but it's also something that a few other people have brought up, and something I've thought about a lot.
"Question - if you had held SPY with your cash holdings since you started tracking your performance, would your overall returns be better or worse?"
I would have definitely done better during the last 3 years holding SPY rather than cash. But I think this comes with a few important caveats (or excuses?☺). 1) the same argument can be made for BTC vs cash, or virtually any other asset class over the past 2-3 years; 2) I think it would be premature to judge performance over such a short period, and arguably not even a full business cycle - though this speaks to your last question about the fed "abolishing" market cycles; and 3) the mere act of holding more SPY vs cash may have altered the composition of my other holdings / overall portfolio strategy, so it's difficult to do a pure apples-to-apples comparison.
I would agree that holding cash amounts to an implicit bet against the SPY. But it is implicit in the the same sense that holding cash is also an implicit bet against BTC, Real Estate, Art, SPAC's, GME, AMC, NFT's or virtually any other non-cash asset.
Thinking about it another way, suppose the Hawaii Angels had a fund that invested in a basket of 25 startups. But, in addition to investing in this "index" fund, you had the opportunity to invest in each company individually. If you analyzed all 25 companies and determined that each one seemed grossly overvalued, based on each company's individual merits, would you still advocate investing your money in the broader "index" and would this amount to "market timing" or something more fundamental?
You definitely raise a lot of good points though, and historical evidence for staying fully invested in the market at times is on your side. Thanks for keeping me honest :)
The question of which approach to take comes down to your view of the efficiency of the public markets and your ability to outperform the index (I'm using SPY as a proxy).
If you think public markets are relatively inefficient and you can do better than the index by investing time in research, as you do, then it makes sense to take a bottoms up approach and look for opportunities that meet your criteria. If you don't find enough good opportunities AND you limit your max exposure to any given stock, then naturally you may have periods of time where you hold cash. I do *not* think this is "irrational."
If you view public markets as perfectly efficient, then you just throw up your hands, invest in the index and call it a day. Anything other than being fully invested is market timing and is irrational to these folks.
If you view public markets as mostly efficient with periods of dislocation, as I do, then you maybe do something in between. I also don't want to invest much time into public company analysis given my view of the low returns on investment of that time, so that pushes me to a more passive approach. I *do* engage is some limited market timing and asset category timing. I generally stay away from individual stocks.
I like private markets because I think they are still MUCH less efficient than public markets, so it is much easier to find good deals. But information is harder to come by, there is a much higher risk of total capital loss, illiquidity, most deals suck, etc... Plus the US private markets are pretty overheated right now.
I certainly wouldn't invest in a fund that invested in 25 startups where decisions are made by 1 or 2 people (unless I had *massive* confidence in those people being able to do better than me). But if there were 2500 companies that were being constantly analysed and traded and implicitly priced by 2.5m people, then that becomes a much more efficient situation where exposure to a broad set of companies will probably lead to a good outcome, and investing time trying to outperform is probably less likely to lead to the desired outcome.
But to be clear, I really hope you are able to consistently beat the index, and I don't think it is impossible - just hard!
Hmm...I think I know what spawned this thought-provoking post!
Question - if you had held SPY with your cash holdings since you started tracking your performance, would your overall returns be better or worse? If Berkshire historically held SPY with their cash holdings would they have done better or worse? Every day you hold cash instead of a market tracking ETF like SPY you are implicitly betting that the cash will outperform the market. That sounds like market timing to me. Unlike Berkshire, who, given their size, might have a little more difficulty converting ETF holdings into cash to take advantage of great opportunities, and thus puts an option value on cash, you can always easily sell the ETF quickly to invest in a great opportunity if it comes along. Plus I think they would freely admit they are implicitly timing the market. Last, does the fed showing that it is willing to inject liquidity quickly and massively change things?
Heh, ya I think this post was spurred by our recent conversation, but it's also something that a few other people have brought up, and something I've thought about a lot.
"Question - if you had held SPY with your cash holdings since you started tracking your performance, would your overall returns be better or worse?"
I would have definitely done better during the last 3 years holding SPY rather than cash. But I think this comes with a few important caveats (or excuses?☺). 1) the same argument can be made for BTC vs cash, or virtually any other asset class over the past 2-3 years; 2) I think it would be premature to judge performance over such a short period, and arguably not even a full business cycle - though this speaks to your last question about the fed "abolishing" market cycles; and 3) the mere act of holding more SPY vs cash may have altered the composition of my other holdings / overall portfolio strategy, so it's difficult to do a pure apples-to-apples comparison.
I would agree that holding cash amounts to an implicit bet against the SPY. But it is implicit in the the same sense that holding cash is also an implicit bet against BTC, Real Estate, Art, SPAC's, GME, AMC, NFT's or virtually any other non-cash asset.
Thinking about it another way, suppose the Hawaii Angels had a fund that invested in a basket of 25 startups. But, in addition to investing in this "index" fund, you had the opportunity to invest in each company individually. If you analyzed all 25 companies and determined that each one seemed grossly overvalued, based on each company's individual merits, would you still advocate investing your money in the broader "index" and would this amount to "market timing" or something more fundamental?
You definitely raise a lot of good points though, and historical evidence for staying fully invested in the market at times is on your side. Thanks for keeping me honest :)
The question of which approach to take comes down to your view of the efficiency of the public markets and your ability to outperform the index (I'm using SPY as a proxy).
If you think public markets are relatively inefficient and you can do better than the index by investing time in research, as you do, then it makes sense to take a bottoms up approach and look for opportunities that meet your criteria. If you don't find enough good opportunities AND you limit your max exposure to any given stock, then naturally you may have periods of time where you hold cash. I do *not* think this is "irrational."
If you view public markets as perfectly efficient, then you just throw up your hands, invest in the index and call it a day. Anything other than being fully invested is market timing and is irrational to these folks.
If you view public markets as mostly efficient with periods of dislocation, as I do, then you maybe do something in between. I also don't want to invest much time into public company analysis given my view of the low returns on investment of that time, so that pushes me to a more passive approach. I *do* engage is some limited market timing and asset category timing. I generally stay away from individual stocks.
I like private markets because I think they are still MUCH less efficient than public markets, so it is much easier to find good deals. But information is harder to come by, there is a much higher risk of total capital loss, illiquidity, most deals suck, etc... Plus the US private markets are pretty overheated right now.
I certainly wouldn't invest in a fund that invested in 25 startups where decisions are made by 1 or 2 people (unless I had *massive* confidence in those people being able to do better than me). But if there were 2500 companies that were being constantly analysed and traded and implicitly priced by 2.5m people, then that becomes a much more efficient situation where exposure to a broad set of companies will probably lead to a good outcome, and investing time trying to outperform is probably less likely to lead to the desired outcome.
But to be clear, I really hope you are able to consistently beat the index, and I don't think it is impossible - just hard!