Lessons From Recessions: Advice From My 80 Million Dollar Mentor
Mentors are essential to your success. A mentor can come in many forms, in person, through books, videos, podcasts; the list goes on. I have mentors in various sectors of life including wealth, health, personal development and relationships.
Today I want to share with you some insights from one of my high-net-worth mentors who has been a full-time passive investor since the mid 1990’s after he sold his company for….mega millions. Over the past few years, he has taught me some incredible investing lessons and below are a few reflections from his investing experience during the Dotcom Crash in the early 2000’s and the Great Recession of 2008-2009. I hope you find these takeaways valuable. Enjoy!
Reflecting on both the 2000-3 and 2008-9 financial crises, here are the five lessons I learned:
- Reserve/preserve cash. Preserve for liquidity, reserve for opportunity. Develop a sense of where and when I should pounce on deeply discounted assets.
- Reconsider equities. The stock market has averaged a 10% return for the past 100+ years, but that has come with 20-70% volatility. When there are large dips, reconsider publicly traded equities.
- Rarely sell, but do monitor. In hindsight, I’ve seldom found selling to be the right move. By the time I decided to sell, it was too late (damage done). The hardest part has been convincing myself to get back in.
- Re-evaluate my liquidity needs. I’ve found the ill-liquidity premium to be a major driver toward superior returns. By giving up instant liquidity, I’ve often been able to move from 2% to 12%.
- Reset my asset allocation. I can’t live with “100 minus my age” — the percent of equities I should have in my portfolio, according to traditional asset allocation theory. I have stayed diversified and susceptible to far less volatility by moving from 60/40 to 5/5/5/5/10/20/30, using a blend of multiple asset classes.
Asset class analysis. After reading scores of 1Q20 commentaries and talking with multiple fund managers/GPs/RIAs, here’s my take on how the asset classes I’m invested in fared:
- Cash. Based on the cash lesson above, cash is King and Queen right now. Money markets only paying <1%, but provide stability and optionality.
- Bonds. Munis are marvelous because AAA paper now pays 80-100 bps higher yield than six weeks ago. My munis were down only 1.5% in 1Q. (Gov’ts are great for safety, but pay a paltry .6% yield — with rate rise risk. Quality Corporates are dangerous with 6-7% bid/ask spreads — HY spreads wider.)
- Real estate. Has proven resilient so far. MF tenants are paying rents (at least they did in April), and asset values are holding (for now). Commercial a mixed bag: office above expectations, but malls getting crushed.
- Public Equities. S&P off 17%, Dow down 20%. Significant recovery since March 23, but my sense is every rally has been a head fake.
- Private Equity. No 1Q market to market reports yet, so values unknown. I’m not optimistic.
- Venture Capital. Still waiting for my 1Q reports, but suspect valuations will plunge.
- Alternative Income (Debt). Talking about RMBS, HY, RE lending, CLOs, etc. Margin calls, redemptions, and M-to-M pricing have pummeled these credits. Seeing drops of 5 to 50%.
- Hedge Funds: L-S equity funds advertise the ability to profit in bear and bull markets, but when the market cracked, funds I’m in could not resist (1) covering shorts prematurely, and (2) buying more of their favorite, suddenly “really cheap” stocks. Hedge funds down 15 to 50+% in 1Q.
Conclusion from Travis:
I want to share with you a fundamental principle that has helped me tremendously over the past decade:
Pay close attention to the 1% of people who are actually DOING what you want to do and IGNORE the 99% who just like to give an opinion. Everybody has an opinion, but the only opinions that matter come from those who have actually accomplished what it is you set out to achieve.
Having these “1% mentors” in your own life can cut the learning curve by decades…
To Your Success