Retirement Investor

Eight Investment Biases of 2021

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Everyone reflects at the end of the year. I cannot help but to reflect on the overwhelming amount of harmful bias that I have encountered in 2021. As you read this, keep in mind these statistics: the S&P 500 is up 29.41%, the NASDAQ is up 23.49%, and the Dow is up 23.73% year-to-date through December 29, 2021. Here are eight examples of bias I dealt with this year:

1.) Politics

Bias: I have been told by Democrats that we needed trillions more in stimulus or markets would free fall, and I’ve been battered by Republicans that almost seem to root for a devastating downturn just to blame the Democrats in power. 

Reality: Republicans may remember that part of Donald Trump’s plan if he got re-elected, was to spend another trillion in stimulus while lowering payroll taxes. President Biden passed a $1.9 trillion stimulus bill and a Senate bipartisan $1 trillion (over 10 years) infrastructure bill. All in all, the Democrats and Republicans in practice have not been too far apart. Deficit spending is both simulative and inflationary so that is what has happened. Risk assets and GDP have boomed, but so have inflationary pressures.

2.) Investing Fads

Bias: I was urged to buy high flying “COVID” stocks, SPACs, Marijuana, Cryptocurrencies, Meme Stocks, Stonks, Biotechs and the latest IPOs. People love blowing on the dice of a hot hand.

Reality: It was justified not to buy these beloved fads for several different reasons. One thing they all had in common was a lack of profitability, or my lack of understanding a path to profitability. Based on that, I took the position that it was largely speculative money in these assets. In some of these cases the jury is still out, but consider these asset drawdowns: Renaissance IPO ETF (IPO: -24.23%), Defiance NextGen SPAC ETF (SPAK: -38.14%), Global X Cannabis ETF (POTX: -78.28%), Proshares Bitcoin Strategy ETF (BITO: -30.19%), and AMC Entertainment Holdings (AMC: -55.68%).

3.) Ignoring Deep Value

Bias: I was questioned for buying an index weight of energy stocks (“Everyone knows it’s done!”). 

Reality: With time, maybe someday the world will be off fossil fuels. That day is not today. The world’s consumption of fossil fuels is still on the rise and while the COVID-19 pandemic temporarily depressed prices to unprofitable levels, it did not mean it was likely to persist in perpetuity. The Energy Select SPDR ETF (XLE) was up 54.86% for the year.

4.) Misunderstanding Total Return 

Bias: I was reproached for selling stock because they paid a nice dividend and replacing it with a stock that wasn’t a household name.

Reality: An investment should be evaluated on a total return basis. Total return has two parts. The cash paid out as either an interest payment or a dividend, and the change in price of the asset. There is an income investing fallacy which I have written about that is pervasive in the investment community. Investors dismiss the change in the price of an asset all together in favor of dividends, which can be a big mistake. 

A business can do four basic things with their cash flows: Reinvest in the business, pay down debt, and return cash to shareholders through dividends or buybacks. Sometimes, even most of the time, the cash is better suited through the non-dividend avenues because it will generate a higher return for the shareholder. Additionally, high dividend yield can be misleading because they often show the yield that has been paid out in the past rather than what will be paid in the future. When a dividend cut is imminent the dividend yield quoted is often very inflated.

5.) Overreacting to Proposed Tax Laws

Bias: I’ve been accused of ignoring harmful effects of changing tax law as I attempted to calm anxieties about proposed tax law which was never even enacted in 2021. 

Reality: There have been several different tax proposals during 2021. Some proposals were measured, some seemed very extreme, but regardless of the actual proposals the reaction to additional taxes were visceral. The reality was that there has not been any new tax law in 2021, and premature reactions to proposals by various lawmakers would have ironically been a large tax on portfolios.

6.) Why Aren’t You Panicking About Inflation

Bias: There was some thinking that I was not sufficiently concerned about inflation. The criticism came with some digs implying I do not fully appreciate its significance and challenges because I was not in the workforce in 1979.

Reality: In our firm’s April investor newsletter I predicted exploding inflation. Here is the actual excerpt:

Core Personal Consumption Expenditure (PCE) has not risen significantly yet, but like GDP, it is positioned to explode during the middle portion of the year. Increases in inflation will come from two sources:

1) The comparable period in 2020 will have a low base. 

2) Demand for goods will outstrip supply.

Inflation – The semiconductor shortage is concerning because semiconductor supply cannot ramp quickly. I think semiconductors are as important to the structural economy today as oil was in 1979.

The role of an advisor, and why a good one is very valuable, is to probability weight possible outcomes and try to position accordingly. In this case, there was good reason to believe inflation, although significant in the near-term, should not last more than a couple years, like the post-war 1946-1948 (wasn’t in the workforce then either) episode. A 2-year demand pull inflation scenario would have less effect on long term bonds than many people would imagine. Even if this viewpoint is incorrect, which is unknowable right now, more market participants than not subscribed to the notion that inflation is not likely to be long lasting, as was evident in bonds prices.

7.) Clickbait and Newsletters

Bias: I endured countless clickbait articles about the Death of the 60/40 and Doomsday for Savers. Clients sometimes come to us with a newsletter that claims they can buy and sell penny stocks effectively.

Reality: In the last 50 years, there was an 84% chance of positive returns with a 60/40 portfolio (60% stock, 20% Treasury and 20% BBB corporates). In the last decade the S&P 500 total return is 363%, the aggregate bond index has returned 31.96% while rates have been “low,” and Core PCE Inflation Index has risen 20.71%. Any mix of bonds and stocks has kept you firmly ahead of inflation. It has been a great time for savers and the 60/40 portfolio, and I do not see much evidence that this will not continue. The buy-and-sell newsletters are so absurd and unethical that I am not going to waste another sentence on them.

8. ) The Glass is Full Mentality

Bias: People often say, “The market is at all-time highs, it has to fall soon.” I call this the… “Glass is Full Bias.”

Reality: The glass gets bigger. The market should make all-time highs as the economy and profits grow. In 2021, as I write this, the market has made 69 new highs in the year. The glass only spilled 20% of the time in the last 50 years and three of those years had losses less than 5%. Finally, if you want to stabilize the glass more you can do so with bonds and diversification.

At AMR, we always say that stocks are long term assets, but no matter how many times we say it, we face bias every day. There will be times when the bias proves to be correct, which would be terrible, psychologically, to an investor. Imagine an investor that predicted the pandemic spread and the subsequent market fall. Do you think that same investor was able to buy back into the market on March 23, 2020 for the incredible market rally in the face of millions of deaths and subsequent virus variants? I doubt it. If an investor was in cash for 10 of the best days in 2021, they would have trailed the market by almost 18% (per Ycharts). If bias kept them on the sidelines, those were some expensive days.

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Brian Regan, CFA

Brian J. Regan, CFA®, MBA, is the Chief Investment Officer for Asset Management Resources, LLC. His responsibilities within the firm relate to investment research, portfolio design and implementation. He has education and experience in portfolio risk management, asset allocation, fixed income security selection, equity security selection, and macro-economic analysis.

In 2010, Brian started his career at State Street Bank’s Treasury department as a Balance Sheet Consultant for a $110 billion portfolio after completing their highly selective Financial Analyst Rotational Program. He then moved to EMC Corporation where he managed a $15 billion corporate cash fixed income portfolio generating $110 million in portfolio income. In addition to the corporate cash portfolio, Brian maintained the fiduciary responsibilities of EMC for the corporate pension and retirement plans.

Succeeding the Dell acquisition of EMC, Brian became a Management Consultant and an integral figure in the restructure and sale of Mid States Supply Company, the restructuring and sale of Enersafe, Inc., and the restructuring of a popular toy company. In each restructuring case, Brian helped to save hundreds of jobs, reclaimed capital for lenders, and maintained value for equity stakeholders.

Brian received awards for excellence including the State Street Above & Beyond award and the EMC Gold, Silver & Bronze awards.

In 2015, the CFA Institute and the Boston Securities Analyst Society credentialed Brian as a Chartered Financial Analyst Charterholder (CFA®) through passing a series of tests. The CFA institute promotes good stewardship and high ethical standards.

In 2021, Brian received his MBA from the Boston College Carroll School of Management. A 2010 cum laude graduate of Boston University’s School of Management (Questrom), Brian takes to heart Questrom’s mission to “prepare innovative and ethical leaders who understand the impact of business on society and create value for the world”.

Brian resides in Boston with his wife Erin. He enjoys Cape Cod beaches in the summer, skiing in the mountains in the winter, and New England sports year-round. Brian has hiked in Alaskan mountains, perused the Louvre in Paris, jet skied in Monte Carlo and scuba dived in the Virgin Islands.

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