The Compound and Friends - Is now a good time to buy stocks? (with Michael and Nick Maggiulli)

Episode Date: February 3, 2020

Michael Batnick sits down with Data Scientist Nick Maggiulli to talk about one of the most commonly asked questions in the world of money, “When is the best time to invest?” The answer will definitely surprise you, check it out. 1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, my name is Michael Batnick. Is now a good time to buy stocks? If you're an investor, you've probably asked this question at least once, probably multiple times in your life. Today, I'm sitting here with data scientist from Ritholtz Wealth Management, Nick Maggiuli. Thanks, Mike. Nick is going to help us answer some of those questions today. Stick around.

All right, Nick, so you wrote a piece called Why Market Timing Can Be So Appealing. Very basic question. What do you mean by market timing? I think market timing is the belief that you can predict the future with regards to your investment decisions. That's what it is in some form or fashion. Do you think that people actually believe that or it's sort of like this illusion or they're like, how do you think people really think about it? I think people feel like they're like, so when the market's going up, you feel like, oh, I should get in now before it goes higher. when the market's going up, you feel like, oh, I should get in now before it goes higher.

And when it's going down, you feel like, oh, I don't want to get in now. I should wait until it's lower. And so people have feelings about the markets based on valuations, based on what's happening in the news, all sorts of things. It's not necessarily calculus. It's feelings. Yeah, yeah. So why is this, I described as like an innate feeling to either want to buy the dip or to

wait for better prices. Why is that such a fundamental part of an investor's experience? Because that's what the data shows. I mean, I ran the numbers on this. And 95% of the time, you pick a random trading day and you look at that close price, 95% of the time, in the future, there will be a lower price. So people have this intuitive feeling like, I want to get the best price possible. The problem is when you try to do that, there are times, remember 5% of the time, where you see a price and the market goes up and it never goes to that price maybe ever again. So that's kind of the fear of, or not the fear, that's the problem with doing

some sort of market timing. So to reiterate, if you buy stocks, let's just say an index fund, the S&P 500, the Dow, whatever. If you buy stocks, historically, 95% of the time, you would have seen lower returns at some point in the future. Not lower returns, a lower price. A lower price. Yeah, a lower price. So negative returns. So yeah, so it's just saying like, you know, 95% of the time, you're not going to get the best price when you're making a purchase. That's just statistically what's going to happen. That's probably true of other markets. I haven't looked at a lot of other ones, but they're probably 90% to 95% of the time, you're not going to, you're making a purchase. That's just statistically what's going to happen. That's probably true of other markets. I haven't looked at a lot of other ones, but they're probably 90% to 95% of the time you're going to be at not the most optimal price you could have been at.

All right. So you did this thing where what if you had not exactly perfect foresight, because you don't know where the tops are, but what if you knew exactly where the next bottom was? So what did you do with this exercise? I said, compare two investors. First investor is doing dollar cost averaging. Every trading day, they just put in a dollar into the market, right? Buying every day. That's what that investor is doing. The other investor is saving, knows the future bottom, and they're holding dollars, just saving a dollar a day until that bottom comes, then they purchase there. And then they do that for the next bottom, the next bottom, et cetera. Now, that money is staying invested the whole time. And as they're moving through time,

they're just saving the extra cash and buying at the bottom. So every time they buy, there will never be a lower price in the future? Yes, based on what's happened so far in history, right? So for example, if we're using the 2020 data, it ends in 2020. But there could be a future. There probably is likely a future price that's lower than the prices we're seeing now, but we don't know. Before you did this, did you have any hypothesis of what returns for investor A versus returns for investor B would end up being? So I knew investor B, the one who's buying at the absolute bottoms, I knew they would outperform. And I thought it would be more significant in terms of the outperformance. I think that's what

surprised me was how small the outperformance was. How small was it? So it's about 0.4% or 40 basis points a year. So over the course of the 50 years, they outperformed by about 22% in total. But when you annualize that over 50 years, it's 40 basis points. So it's much smaller than I thought. I'm not saying that's not nothing. Don't get me wrong. That can be significant. But at the same time, it's smaller than I thought.

It's not that big of a jump. So I would say if I had to pick some notes, and this is ridiculous because this is fantasy land. So it's like watching Avatar and saying it's smaller than I thought. It's not that big of a jump. So I would say if I had to pick some nits, and this is ridiculous because this is fantasy land. So it's like watching Avatar and saying it's not realistic. I mean, of course. But if you knew where the bottom was, what if you knew where the top was

and you could take all your money out? That's one nitpick. I mean, that would definitely help a lot. Yeah, if you knew where the top was, you could sell at the top, buy at the bottom. That would outperform by far more. I mean, the whole idea of this post

wasn't to be like, okay, if you knew perfect foresight, you couldn't make money. No, of course. And honestly, you wouldn't be long. If you knew the future bottom, you could sell options, do all sorts of stuff though, and you make a lot more money than being long. But that's not the point. The idea is someone, like I'm trying to replicate what someone's actually going through in their actions. They have money, probably invest in the market. They're not going to be selling everything and then buying everything. They're not going to be doing that, but they probably do have some cash on the side. They're like, hey, I have this extra thousand bucks or I have whatever, and I'm considering investing, but I want to wait. Those decisions, I'm trying to get those people because that's probably more

reflective of how people actually think, how you and I are probably investing. You're not moving to cash or to bonds and then moving all the stocks really quickly, but you probably do have a little bit of side cash. You're like, oh, maybe I should invest that. I don't know. So you're not talking to Warren Buffett? No, I'm not. No. So Nick, what are the real implications for investors? The implications are that don't worry about trying to get the best price. You might have excess cash. You want to put it to work. Put it to work now. Don't worry about trying to get the best price. It's very likely you will not get the best price, and that's OK. Don't worry about those little deviations, because in the long run, a lot of those things won't matter.

Even if you knew the perfect price, as I said, you only outperform by 40 basis points a year, which is a very small amount. So assuming this is not Japan. Yeah, assuming this is not Japan. Assuming that as long as the asset has a long-term positive trend and positive return, I wouldn't worry about trying to get the best price and all that. And you're just going to beat yourself up in your head. Focus on other parts of your financial life.

Focus on other parts of your life, frankly. And just do that. And don't worry about trying to get the best price and all that, and you're just going to beat yourself up in your head, focus on other parts of your financial life, focus on other parts of your life, frankly, and just do that. And don't worry about trying to get the best price. That's the takeaway. I'm trying to relax people. That's the thing. One thing that we didn't even mention is that the idea that people that are worried today, that they're going to hoard their money and buy at lower prices, if they're worried at all-time highs, how worried are they going to be when we're 30% off the highs? Much more. I can say that. Because I know the feeling of like, oh, when the market's going down, you're like, oh, I'm going to wait and I'll get a better price. I'll get a better price. And then maybe it comes back. And then by that time,

maybe it's already a new all-time high. So it's like the tyranny of lower prices. Yeah, it happens. All right. Great post. Thanks, Nick. I appreciate it. Thank you, Michael. Let us know what your thoughts are on timing the market, dollar cost averaging, lump sum investing. We love your feedback and look forward to catching you next time.