The MMA of Investing

investing boxing

I love martial arts.

I practiced Tae Kwon Do growing up and I got to take a closer look at most of the Asian Martial Arts when I lived in South East Asia in my twenties.

But it wasn’t until mixed martial arts (MMA) came along that I noticed a major weakness in all the others.

The weakness of any martial art is the set of principles laid down by the previous authority as being undeniably true. As the undeniable truth becomes beyond reproach the sport starts building its culture around its weakness.

What could possibly go wrong with that?

Let’s Dig In.

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Chinese martial artists are incredible fighters.

But they believe it’s not honorable to fight on the ground. So they’ll stop a fight if one of the fighters falls.

But when people are in actual fights they don’t get time to stand up, they get hurt. So there’s a weakness in Chinese Martial Arts and its only obvious when the fighter shifts his focus to what really works and away from what’s “culturally correct.

Chinese Martial Arts is like the Buy and Hold Investment Approach.

They both work as long as everyone stays standing. But what about those nasty 50% falls in the stock market? Or how about those “well diversified” portfolios that always returns the market’s average?  

The “Buy and Hold” approach is “culturally correct” as long as you follow the “Buy and Hold” set of principles laid down by the previous authority as being undeniably true.

Just don’t Fall Down.

As you can see in the image below falling down hurts. The “Buy and Hold” approach stole twelve years from everyone of its follower’s lives. But that was okay, because the culture of weakness in the “buy and hold” community is one where they protect and defend this obvious flaw.

Yes, “buy and hold” followers got their money back eventually IF they stayed the course but how many of them did?

And even IF they stayed the course, they lost a full 12 years of their investment life. If an average person’s investment life is 30 years then they lost a full 1/3rd of their life.

That’s like dying at 52 instead of 78, the average life expectancy for a male in the US.

Judo is like the Standard 60/40 Investment Approach

Judo athletes are incredible fighters.

But the Judo culture does not allow for a fighter to fight while on their back, so Judo fighters will often rollover to their stomach, which will signal the referee to stop the fight and allow the fallen fighter to get back up.

But when people are in actual fights they don’t get to lay on their stomach and wait for a redo, they’ll get badly hurt. So there’s a weakness in Judo and it’s only obvious when the fighter shifts his focus to what really works and away from what’s “culturally correct.”

Judo is like the standard 60/40 investment approach. The 60/40 investment approach states it’s best to always allocate 60% of your money to stocks and 40% to bonds and then rebalance one to four times a years. They both work as long as everyone stays standing. But what about those nasty 50% falls in the stock market?

Just don’t fall down.

Followers of the 60/40 Investment Approach Lost Ten Years of their Investment Life.

And the 60/40 investment approach works as long as the market stay standing on its feet. But if the market gets knocked down like in 2000 or 2008 then 60/40 investment followers get killed.

Followers of this approach lost on average 33% in the 2000 dot com crash and 43% in the 2008 Global Financial Crises.

But the absolute loss wasn’t the most devastating weakness of this investment approach. Followers of the 60/40 investment approach lost ten years of their investment life.

You say, that’s not as bad as the “Buy and Hold” culture who lost 12 years? But you’d be wrong, because the promise of the 60/40 investment approach is safety. And that means the majority of its followers are in their 70’s and 80’s.

And relatively speaking a follower in their 70’s has fewer years to waste in getting back to breakeven then someone does in their 40’s. Heck, life expectancy in the US today for a male is 78. And they just had to wait ten years to breakeven!

A 70 year old never recovers from that loss. And don’t even get me started about how this approach will only work if the bond market stays in its 35 year bull market.

Boxing is like the “Pick of the Month” Newsletter Industry

Boxers are incredible fighters.

But the rules of the boxing are that you can only use your fists wrapped in 18 ounce gloves. And if you fall you get a ten count to gather yourself before fighting again.

But when people are in actual fights they don’t get a “ten count” to gather themselves and start fighting again, they’ll get killed. So there’s a culture of weakness in boxing and it’s only obvious when the fighter shifts his focus to what really works and away from what’s “culturally correct”.

Boxing is like the “pick of the month” newsletter industry. This “narrative-based” approach works great in isolation but in reality, the more ticker symbols an investor owns. And the more frequently an investor interacts with those ticker symbols the poorer they become.

The research behind frequency and “story-based” investing is deep, sustaining, and peer reviewed.

It. Doesn’t. Work.

Buying the Market Will Perform 9.4X Better than a DIY Investor

But this is where the “pick of the month” newsletter industry wants you to live, and it becomes devastating to people’s lives. Just look at the difference in numbers below.

Simply buying the market will perform 9.4X better than someone that has taken over their own account and uses the “pick of the month” newsletter industry for guidance.

See the image below to fully understand how the “pick of the month” newsletter industry’s culture of weakness impacts its followers.

Each Fighting Style’s Weakness then Becomes Dogma

All three fighting styles have built a culture of great respect and loyalty around their weakness.

And questioning that weakness is beyond reproach. Each fighting style’s weakness then becomes dogma (beyond questioning).

And then decade after decade each fighting style continues to recruit more fighters (disciples)  which continues to reinforce a system of respect, a book of rules and a code of honor in protecting their sports weakness.

Just do What Works.

And then you have MMA.

Mixed Martial Arts is the fastest growing sport in the United States. And MMA only has one rule. The fighter cannot do anything to permanently damage their opponent.  That means no groin hits, back of the head hits, fish hooks, eye gouging, head butting, etc.

That’s it.

And what’s left? Everything that works.

You can use Judo, Chinese Martial Arts, Boxing, Muay Thai, Jiu Jitsu, Brazilian Jiu-Jitsu, Wing Chun, Karate, Jeet Kune Do, Capoeira, Savate, Taekwondo, Sanshou, Hapkido, Sumo, Wrestling, Aikido, Sambo, Kung Fu, Savate or anything else.

You can fight standing. You can fight laying on your back. You can grapple. You can strike with your hands or legs. You can choke. You can use joint locks. Just do what works to win!  The culture that surrounds MMA and the reason why it’s the number one growing sport in the United States is because people get it.

Just do what works. There’s no culture of weakness that needs protecting. The MMA approach is novel. And brilliant. Just. Do. What. Works. And yet almost no one does this with their investment approach.

The MMA of Investing

Investment approaches like fighting styles have built culture and respect around the very weakness of its approach.

Tell a “buy and holder” you are willing to take your money out of the stock market and they’ll go nuts and accuse you being a “timer.”

Tell a “60/40 splitter” that you are willing to have all of your money in bonds or stocks or cash and they’ll accuse you of being a “speculator.”

Tell a “pick of the month groupie” that you are willing to have all of your money in two market-based ticker symbols and they’ll accuse you of being a “closet indexer.”

You get it? They HAVE TO defend their chosen investment approaches cultural of weakness. They just don’t know it. And this is why you have long-only big box advisers telling you to “stay the course” when the market falls 40%, 50% and even 60% percent. The culture of the “buy and hold,” the “60/40 Split” and the “pick of the month” newsletter industry is a culture of weakness.

With the “pick of the month” newsletter industry is being the most damaging to people’s wealth. As the average investor in this DIY world is doing much worse than even the big-box adviser world.

This is Actual Life in the Real Investment World.

Guys, this isn’t Chinese Martial Arts where you get to stand back up.

Guys, this isn’t Judo where you get to lay on your stomach.

Guys, this isn’t boxing where you get a ten-count.

This is actual life in the real investment world. And sometimes a real world asset falls 40% or 50% or 60% or even more.

The NASDAQ fell 79% starting in 2000. Emerging Markets fell 68% starting in 2007. The Japanese stock market fell 83% starting in 1989 and still hasn’t recovered. Falls happen. Just like in fighting. Investment falls of the above magnitude do not happen that often but when they do, you have to be prepared.

Take the Novel Approach, like MMA has done, and Just do What Works.

Know when to be in or out.

And if “in” know where to be in.

And if “out” know where to be out.

Below is an image of knowing when to get in or out. The blue line is the result of asking two questions…

  1. Should I be IN or OUT of the stock market?
  2. And if IN, then where. And if OUT, then where?

This approach might mean being in the market for long periods of time regardless of age or self describe risk tolerance. Or this approach might mean being out of the market for shorter periods of time regardless of age or self-described risk tolerance. Or this might mean being 100% in bonds or stocks, or cash or commodities or…

Again…

The weakness of any investment approach is the set of principles laid down by the previous authority as being undeniably true. As the undeniable truth becomes beyond reproach the investment approach starts building its culture around its weakness.

Just do what works.

In Your Corner,

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RC Peck, CFP

 

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