The Investment Night is Dark and Full of Terrors


Winter is coming for the current eight-year bull market. Only a charlatan or a fool will confidently tell you the exact date of its imminent or much deferred arrival. There is no red clad sorceress like Melisandre out there to revive the dead or predict the outcome of great battles for retirement savers.

In other words, “You know nothing about the future, Average Investor.”

Those who do not believe this are likely to see their portfolios burned at the stake or flayed slowly to death.

More importantly, a Night’s Watch does not exist to protect you from the original financial usurpers – White Walker-like financial salespeople looking to stake a claim to your retirement accounts.

The fact is, it not a question of if — but when — the frozen angry bear will make its next ferocious appearance. Will you be ready?

Our enthusiastic intern, Tommy Tranfo is both a big fan of the Game Of Thrones and my blog; though I am sure he looks forward to the former much more. Tommy is receiving the education of a lifetime at our firm. He has been assigned the enormous task of archiving and categorizing the thousands of blog posts our team has produced. When he completes this job, his efforts will provide enormous benefits to our firm, clients, and followers for many dark winters to come.

I would make a bet that digesting the combined knowledge of all these posts is worth more than an M.B.A. from some pretentious and overpriced private university. Tommy is bright enough to realize this. I see it in the way he carefully reads each of the articles he is categorizing.

One of my favorite things is to help young people get started in the business the right way. Too many are shanghaied into demeaning sales positions and seduced by perverse investor unfriendly incentives. Tommy is well on his way to avoiding this trap by learning from the best, how to do things the right way.

The posts he has been reading inspired him to write something himself. I love when young people seize the initiative.

I think this is pretty good. You can be the judge of that for yourself. In honor of Sunday night’s premiere of Game of Thrones, Season 7, here it is:

Life Imitates Art far more than Art Imitates Life by Tommy Tranfo

For all the fans of the series A Song of Ice and Fire, this quote should hit too close to home. Some fans, like my dad, have been waiting 21 years (my entire lifetime) for the scourge of winter to scar the lands of Westeros; finally vindicating our hero, Jon Snow. However the evidence is starting to pile up that prove the Lannisters may be right… winter may never come. This analysis, of course, has nothing to do with the story itself, but rather the frustrating fact that George R. R. Martin seems content to play his epic out on HBO and leave the book writing to another generation of maesters.

Investors are not as lucky as the peasant folk stuck in their eternal summer. Whoever is writing the script of reality is not likely to give up anytime soon. As we experience our long summer of bull markets, we must always be prepared for the bear winters.

If I were to prescribe house words to the Ritholtz office it would be something like, “Bear markets are coming.” The same way the ruling class of Westeros grew complacent, investors are prone to give into recency bias. Recency bias will constrict one’s views when making decisions by only valuing recent experience instead of evaluating the bigger picture.  We saw this happen right after the financial collapse of 2008. Investors were so scarred by this event that it took them years to put their money back into the markets, missing out on years of gains.

As Tony Isola puts it, “Preparing for the worst ahead of time and having peak anxiety before (rather than during) the market crash will save you a lot of money and minimize your mental duress.” The saying, the calm before the storm, is a horrible way to behave for the future. We should be frantically preparing for the storm on the rare occasions when the calm gives us the opportunity. Here is Tony’s list of things you can be doing to ready your portfolio:

  • Make sure you own high-quality treasury or corporate bonds for the defensive component of your portfolio. Make sure “bond substitutes,” like MLPs and Emerging Market Debt, are properly characterized as stocks.
  • Create a savings account that contains funds you might think you will need in the next five years. This money should only be invested in FDIC-insured savings accounts and C.D.s.
  • Keep a portion of your portfolio in a flexible/tactical rules-based model to help protect against 50%+ stock market declines.
  • Speak with your accountant about the potential for tax-loss harvesting during a financial free-fall. Have a plan in place to lower your current tax bill and benefit from a future recovery.
  • Keep your investment expenses low. There is nothing worse than paying high fees on products that are experiencing double-digit losses.
  • Diversify broadly; and with extreme prejudice.
  • Have a will, healthcare proxy, and power of attorney in place, along with disability and life insurance policies. Checking these items off your list is a terrific way to burn your anxiety-fueled energy.
  • Turn off the T.V. during the crisis period. This will not be your life raft. Pouring kerosene on a raging fire rarely ends well.

Who do you want to be? Cersei Lannister, who is only concerned about thriving in the summer; or Jon Snow, whose clairvoyance will likely save the world. We must never forget; winter is coming.

If you are looking for someone to help you deal with the inevitable frigid winters of future bear markets, let us know.

No need to send a raven; this will suffice.