“Right now the world is primarily long only. That seems dicey…”

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Hi Michael,

I always enjoy your podcast and think you are a gifted speaker. Contacting you for 2 things:

1) do you have transcripts for your podcasts? In particular I am in interested in the Markowitz podcast. In addition to being shocked as your were about his youthful voice, I was also surprised at his candor about the misrepresentation of his work throughout the industry. Would like to see some of his specific statements. I often share the contents from memory with friends but am starting to forget the exact wording.

2) I take issue with your criticism of buy/hold. I too am an independent futures trader, Wharton MBA, and was a very profitable interest rate and credit derivative trader at Merrill Lynch in the 90s – generated over $100M pnl in less than 10 years. But recently I dug deeply into the long only side, dissecting historical data going back 150 years in a myriad of ways. The persistence of long term broad stock market performance was very surprising.

I too always wondered why a rational investor would subject themselves to an investment likely to lose 1/2 its value (possibly multiple times) over his investment time horizon. I still make a living as a discretionary trader but after carefully looking at the data I have a newfound respect for buy and hold…if properly managed for liquidity needs. Standard industry practice of blindly making decisions based on meaningless rules of thumb is ridiculous.

Let’s say that I define risk not as a statistical measure but as the probability that I can’t meet predefined annual liquidity needs (defined as 5% of portfolio value) starting at age 65 and continuing into perpetuity (wishful thinking). Nothing ever changes in terms of asset allocation or approach – manage solely for liquidity needs (which may mean for next gen when health deteriorates). My basic thesis is that the market will always go up in the long run, subject only to the fall of US capitalism or, say, 30 years of 20% compounded growth such as Greece or Japan.

With rare exceptions, market corrections and subsequent reversions to an adequate IRR (say 5% compounded annually from previous peak) are surprisingly short. Most are inside 18 months and only 6 corrections in the past 100 years extend beyond 5 years before recovering sufficiently to yield 5% CAAR. The notable exceptions being 8/1929 (25 years to 5% IRR), and 7/2000 (18 years to 5% IRR).

I can’t manage liquidity risk with a long only equity index over weeks or months, but I can manage it over 5 years. From a practical standpoint, I can maintain a 5 year liquidity bucket that I only refill if market at a sufficient price level to reflect, say, 7% CAAR from last peak. Else I draw from the bucket and expect at some point to have to sell at a lower price when a correction extends beyond 5 years. But at only 5% of the portfolio the impact would be quite small.

Interested to hear your view on the idea.

Keep the podcasts coming! Very refreshing

Thanks for your note.

I don’t have transcripts up yet unfortunately. In terms of buy and hold I lay out my best take on that in my 2017 edition of Trend Following. Right now the world is primarily long only. That seems dicey.

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