John Wooden knew a thing or two about success. Not only did he win 10 national championships (7 in a row, from 1967-1973) as the coach of the UCLA basketball team, but as a player he was a 3-time All-State selection and led his team to a state championship in 1927. His athletic success didn’t end there. He was a great golfer as well. He had a hole-in-one and a double eagle (3 under par) in the same round back in 1939.
In addition to his coaching success, John Wooden was famous for his short, inspirational messages. One of my favorites is “Don’t mistake activity with achievement”.
As investors we want to feel like we’re making constant progress towards our financial goals. We want to see our account balance get a little bigger every month. We want each quarter’s dividend total to be a bit bigger than the previous month’s total. We want to invest new money as soon as we can. We want to be getting closer to our end goal of financial independence.
After all, doing nothing with your money just seems wasteful, doesn’t it? Time is money!
Right?
Doing nothing is underrated
The Nevada Public Employees’ Retirement System is a $35,000,000,000 (yes, that’s 35 billion) dollar fund that provides pensions for police, fire fighter, and other public service employees in Nevada. The entire $35B fund is managed by one person. What does this person do with the portfolio on a day-to-day basis?
Absolutely nothing.
The manager, Steve Edmundson, has the entire fund invested in index funds. He says he may make one change to the portfolio per year. From the Wall Street Journal (Oct 19, 2016):
Will the 2016 elections affect his portfolio? “No.”
Oil prices? “No.”
He follows Fed Chairwoman Janet Yellen , but “there’s a difference between watching and acting.”
He’s not the only person who preaches the value of doing nothing with your investments. Warren Buffet, the Oracle of Omaha himself, wrote in the 1990 letter to shareholders:
Lethargy bordering on sloth remains the cornerstone of our investment style: This year we neither bought nor sold a share of five of our six major holdings.
As of the most recent end of quarter (June 30, 2016), Warren Buffet’s Berkshire Hathaway had $72.68B in cash. $72.68 BILLION in cash, waiting to be deployed. The current market cap is $354.89B. That means that just over 20% of Berkshire Hathaway’s market cap is in cash. For individual investors that would be equivalent to having 20% of your net worth in cash. Why is Warren Buffet holding so much cash? Because he doesn’t think there’s anything out there right now worth buying.
Why?
The market is really, really expensive right now
For the last few months I’ve been publishing articles showing that the market, as a whole, is 60%+ overvalued. The Schiller P/E is as high as its been since Q3 of 2007 (yes, right before the global financial crisis and the market getting crushed). Looking at the past, whenever the market’s valuation has been this high, a sharp decline follows. Nobody knows exactly WHEN this drop will happen, but it will come.
That’s not to say that we shouldn’t put any money in the market, but it would seem to imply that we should be very selective with our investments. Investing in a S&P 500 index fund seems like a really bad idea right now. Your returns over the next 5-10 years are probably going to be pretty poor due to the current overvaluation.
But that’s not to say there are no good investments right now. There are certainly pockets of valuation, even in the current overheated market. For example, I think that financials (insurers and banks, specifically) and some of the oil majors are interesting right now.
If you find a high quality company at a compelling valuation then it might make sense to pull the trigger on an investment today.
Otherwise, you’re better off doing what some of the most successful investors in the world do – absolutely nothing.
Save your money, build your cash reserves, and when better opportunities present themselves you’ll be ready.
It’s easy for Buffet or any other billionaire to spout out the nobility of doing nothing. When Buffet or other successful investors were trying to get rich, they were investing far more actively and took bigger chances than now. Despite the daunting fact that most investors, both novice and pros don’t beat the S&P index, part of the interest is trying to outperform the overall market. There’s no doubt active trading, trying to time the market is a fool’s game for most of the people who don’t know what they’re doing.
As for the market’s value now, no one knows if it’s overvalued or not for sure. If someone is convinced that the market is way overvalued and likely to tank in a year or two, I think the best strategy is to short the heck out of it. I don’t think it’s that overvalued though since we’ve never had 0% rates for so long, with Europe & Japan even going into negative rates. Thus, comparison to 2007 when interest rates were much higher isn’t exactly a fair comparison in my view. In 2007, if someone invested in Amazon, Apple or Google, they would’ve done extremely well. Even now, there are many companies growing and selling at a bargain, but the trick to finding them and investing a large amount in them.
I disagree that “as for the market’s value now, no one knows if it’s overvalued or not for sure”. I will agree that nobody knows if it will continue to go up or down in the future, but by just about any metric you want to look at the market is clearly very overvalued.
Of course, the good news is that just because the market as a whole is overvalued doesn’t mean that every stock in the stock market is overvalued. I believe there are still some interesting stocks out there that might be worth buying today.
As for Buffett and others, nothing I’ve read or seen would lead me to believe that they are investing differently today than they did when they were starting out. In fact, Warren Buffett chose to shut down his original partnership in October, 1969 because he believed the market was too high and he couldn’t find bargains worthy of investing in. In short, he chose to do nothing and take all the money off the table. And this was in 1969, after only 13 years of investing and running Buffett Partnership Limited.
You phrased it better than I did. Yes, it’s very true, the market is overvalued by traditional metrics, but due to the continued low interest rates, the market may continue to rise or not fall much. I happen to believe that if someone’s truly has done their homework and is convinced that market is that overvalued, then take action and load up and short the overall market. That’s way better than just doing nothing in my view until the market becomes undervalued.
Behind every buyer, there’s a seller and vice versa. Both are convinced they’re right. That’s what keeps investing interesting.
I read that article in the WSJ about Nevada pension. Really fascinating how the pension funds are moving in this direction. It seems so obvious but what has taken them so long to see light. I mean if the best investor of my lifetime is telling normal investors to buy passive index funds I think it’s time to start adhering to this advice 🙂
I’m actually a bit surprised about Buffett’s advice to his wife/heirs to put their money in index funds. This would seem to imply that he doesn’t have much faith in his successors at Berkshire Hathaway (BRK). After all, in many ways BRK is a mutual fund – it owns a highly diversified array of businesses outright, plus it owns large stakes in a number of other publicly traded companies. So if the goal is to have his heirs put their money into a diversified investment vehicle, why not just hold on to their shares of Berkshire?