The key to making money in 2020-2030 is not going to be found in passively investing in the major stock market indexes.

To explain why I turn to the phrase “stick to your guns” or in Britain – the birthplace of advanced naval battle  – “stand to one’s guns.” It means broadly to continue to hold to your beliefs (and to act accordingly) even when people disagree with you. 

Where it derives from is very relevant to investing. The phrase “stand to one’s guns” is a military saying that means, literally, a directive to ensure that gunners remained at their post during battle. The first reference appeared in 1769. James Boswell, Samuel Johnson’s biographer, wrote: ‘Mrs. Thrale stood to her gun with great courage in defense of amorous ditties.’

I imagine those tall-masted ships at the Battle of the Chesapeake, with the sails billowing out like clouds and shrouded in smoke. They didn’t last long in battle unless their guns could blow big holes in the enemies faster than the enemy ships could pillory them. It took real conviction to stand by one’s guns, as you got a front-row seat for what the enemy fired back and seldom remained in one piece!

That’s exactly what it is like to be a traditional, value-focused investor in 2020.

What has this got to do with investing?

Right now is the time for real investors to be cautious. That’s because caution is not a mainstream idea and it’s a lot like sticking to your guns: harder, when equity markets continue to canter higher and effectively every uncertainty is simply matched by higher and higher prices for, well, everything! Gold, stocks, bonds, Bitcoin, even fine wine, whiskey and art command very high prices.

Real investors understand that there are a lot of risks for stocks that are not currently priced into the market. 

As I wrote before – Warren Buffett is sitting on $129 billion dollars in cash. That’s enough to buy Eli Lily, Salesforce.com, or Paypal outright. Why would arguably one of the best investors in the history of the stock market be sitting on so much cash? Why did he buy Apple in 2017 for an average price of $141 per share when equity analysts touted that Buffett had lost his touch and was buying too high?

He stuck to his guns. He valued the business on the future cashflows it offered, determined over the long run that it was mispriced, and bought the company’s stock. In the case of Apple he’s now sitting on a 129% return worth billions of dollars. At that moment in time people were undervaluing Apple. 

Good investors need to be neither over-exposed to this market nor under-exposed. You need a good, unleveraged, well capitalised position where you can scoop up deals as and when they come along between 2020-2023.

The market might collapse this year, due to temporary hits to growth linked to the coronavirus. Or the massive global auto recession that’s on-going. Or a blow up in the bond market where currently BBB rated debt is nearly identical to BB rated debt, and the yield curve has inverted again (twice). 

Or maybe it won’t and we will get the forecast 10% or so return on stocks. It might blow up next year or the year after.

The point is that sticking to a rational, logical and determined approach to investing is the only real way to go: by classical measures stocks are very expensive today.

The Death of Buy the Dip

I guess the key to answering this lies in the fact that Buy the Dip has been a very successful and lusciously simple strategy since 2009.

As you can see below the market has simply gone up, more or less, in a straight line after the worst of the financial crisis. The worst falls occurred in 2011 and 2016, along with the 20% drop in December 2018. However we’ve recovered and seen another rise to all-time highs since then:

Sooner or later Buy the Dip is going to die as an investment strategy. The market is not going to just “fall slightly and rise a lot shortly after.” Pretty soon it is going to “fall slowly, a lot,” and when investors are crushed and have no confidence or money left, only then will it rise.

As you can see it happened in 2000 and 2008 before

Imagine in 2000 watching stocks falling 15% and buying the dip. You’d have bought and bought stocks as they slid 20%, then rallied, then slide by 30% cumulatively, then rallied – then 40%, 50%, 60%. Writing it is just painful: investors should have been smart enough to cut their losses. Many did and never returned to the market.

When momentum breaks to the downside you ought to sell once stocks sustainably go below their 200 day moving average, as described here.

Stand by Your Guns – Be Conservative 

Selling stocks and sticking with bonds in exclusivity is a bad idea. Treasury bonds have real yields that are virtually nothing. Corporate bonds, especially if your bond funds have long maturities and some spotty credit ratings, are also at risk. 

Keeping money in cash will lead to it getting eaten away by inflation, albeit only running at 1.9% in the US. To catch up you are eventually going to need to invest in stocks or you will end up working until you’re 70. 

The real battle is going to be for stable, income producing assets. Make sure you are standing by your guns now and you’ve got a stake in this game, for the long term.

That means effectively priced and central Real Estate that can be rented out at decent yields and managed for many years.

That means dividend paying stocks that are fairly well valued and have good, stable dividends. We will shortly take a look at this in detail and define what dividend yields and “shareholder yields” are and how they can help you to find good investments.

That means renewable energy infrastructure funds, utility companies, and companies like Unilever with strong cash and profit generation even when times are tough.

That means not being 100% invested in the market, especially if that means you won’t have money to re-invest if the market falls 10-20%. In other words follow Buffet: have a war chest of cash alongside your investments to put into the market when it becomes a “buyers market.” Personally I advocate and follow a 50:50 split between equities and safer bonds/fixed term savings.

That does not mean chasing growth and trading in and out of shares that you don’t intend to ever own for more than a year. That also means avoiding Bitcoin, options or derivatives trading, short selling, forex trading, or anything that involves daily or weekly work (apart from watching the market and waiting for extremely good opportunities).

Watching Paint Dry

If you follow the Market Timing Model then you know that on the 20th of January 2020 it tripped a sell rating.

Despite a nearly 3.5% rise in the S&P 500 since then, we still encourage investors to think about the risks to the market.

Investing can be a slow process and waiting for big opportunities is a bit like watching paint dry. You need to see evidence that is independent of the “price” of the index, and you need to see that evidence suggesting that stock markets are undervalued.

At the moment there is no such evidence. Rather than picking an aggressive 70-80% weighting to stocks, take a step back, choose a low gear, and just wait to see what will happen.