Bo Jackson is the only athlete to be named an All-Star in both Major League Baseball and the National Football League. So in 1989, when Nike launched his cross-trainer shoe campaign...the hook was a playful embroidery of his athletic talents: Bo Knows.


And not just baseball and football knowledge, but every sport.


Cameos from Jon McEnroe, Joan Benoit Samuelson, and Michael Jordan.


Bo knows tennis. Bo knows running. Bo knows basketball.


In another ad, even more playful a jockey, a racecar driver, a cricket player.


Bo knows all of these, too.


The premise of the Bo Knows campaign is a constructive reference for investors. What greatness should our portfolio pursue?


Three candidates:

  • Great at everything (commercial Bo Jackson)

  • Great at a limited number of things (actual Bo Jackson)

  • Not great at anything, but decent at everything (not Bo Jackson)

Great at everything. ⚽⚾🏀🏐🏈🥅🎳🐎🏏🏎️


Burly muscles might help in baseball and football, but a great horse jockey they doth not make. Because there are ideal different body types and skillsets for various sports, Nike's campaign paints an unattainable version of athleticism. The same goes for investing.


There's no way to be prepared for, AND great at, every market environment. Portfolio decisions come at opportunity costs to other decisions, not unlike deciding to lift weights and play football (Bo weighed 230 pounds), versus pursuing a horse jockey career (most male jockeys weigh just over 100 pounds).


If you want less bonds, you need more of something else. If you want more stocks that pay dividends, you'll need to own less stocks that don't pay dividends. You don't have to constantly think about tradeoffs, but they're always present, nonetheless.


Some investors will decide that some tradeoffs are worth making. For instance, if you have conviction that bonds will do poorly, or dividend-paying stocks will do well, you can position accordingly. And if you can forecast effectively, you don't need to be great at everything that might happen, only the things that will actually happen.


Should we just be great at what we know will happen in the future?


Great at a limited number of things. ⚾🏈


This approach is the heart of the Bo Jackson investing puzzle. We are familiar with the stats about how difficult it is to be a professional athlete (much less twice over, and an All-Star to boot), but great investing outcomes aren't like pursuing a professional sports career.



Unlike Bo Jackson, we don't need talent (nor work ethic) for our portfolio to be great at a limited number of things. Sell our bonds, and our portfolio can be great if bonds do poorly. Buy only dividend-paying stocks, and we can be great if dividend-paying stocks perform well.


The problem is we're now relying on the ability to forecast the performance of assets.


This is a dividing line amongst professional and amateur investors alike is forecasting asset prices possible? According to many professionals, it is.


The WSJ's Cristina Lourosa-Ricardo recently had a great piece where she interviewed 20 experts on how to navigate the current market environment. It's a diverse collection of opinions, and 14/20 experts suggested some sort of market-timing or stock-picking.


Here are some snippets:

  • Now is the time to add dividend-paying, value-based stocks

  • Allocate capital to companies with strong earnings resilience

  • Increasing the equity allocation to the right kind of stocks

  • Add high quality, dividend-paying stocks

  • Seek the diamonds in the rough

  • I'm not too optimistic about stock right now given where valuations were before the drop

I'm not telling any tales out of school here. These experts are on public record. Nor do I think they're idiots. They just have a different investment philosophy, but it's one that starkly contrasts empirical research.


The overall track record of picking stocks, rotating sectors or stock characteristics (like stocks that pay dividends vs. stocks that don't), and market timing – is awful. I can't claim that any specific person, like the experts in this article, can't have success. But the odds are stacked against each of them.


Every moment of the trading day, stocks are being repriced with new available information. If it was so obvious that dividend payers, or companies with strong earnings resilience, etc...were the right thing to buy – we should assume that other investors have already bought them, and that the current price already reflects this obviousness.


Consider that dividend-paying stocks, which are typically larger, robust, steady companies that have the ability to share their profits with stock owners (i.e. pay dividends), have already done much better than their counterparts (i.e. smaller companies in growth mode, that don't pay dividends yet).


Look at the data going back one year:


I won't deny that, all else equal, it might feel nice to own a lot of dividend stocks right now. If a nasty recession hits, steady companies could be a great portfolio ballast. But all else isn't equal.


It's not enough to say dividend payers are attractive here – but rather: dividend payers are still attractive even though they're 17% higher than their counterparts from a year ago. The former is a comment without context, while the latter is part of a potential investment thesis.


But I don't even buy the thesis. Rather, the 17% difference reflects that dividend-paying stocks indeed are likely more attractive in this environment, as the probability of an economic environment favoring those types of stocks has increased (though not been guaranteed). But the new 17% pricing difference is what makes either strategy reasonable.


I might go to the store thinking steak sounds lovely tonight, but if it's priced 17% higher, even though it's still a lovely idea, I might buy turkey instead. Lovely ideas aren't enough.


If you can align with me that price is an equilibrium to make attractive things expensive (certain stocks in certain environments, steak, etc...), and less attractive things cheaper (certain stocks in certain environments, turkey, etc...), then it's worth going one step further...


What is the opportunity cost of being wrong? What if there is no nasty recession? What if dividend-payers don't work out for you, and it's the small cap growth stocks that shine? What if bonds recover to have an incredible rest of the year?


What will a speculator do when he proudly shows up to win the horse race, but he's wearing football cleats or basketball shoes?


Invest with an equipment locker, not a gym bag.


Forget Bo Jackson. These opportunity costs are unnecessary to participate in a successful investment experience. You can't be great at every market environment, and while you can be prepared to be great for a few market environments, you'll never know when they'll show up, and will often find yourself in the wrong uniform.


Here's a better idea, the third option.


Be decent at everything.


Have you noticed that in the past couple months, as investors have been discussing economic worries and high inflation continues, the stock market has put on a show?


Precisely because prices reflect available information, we often observe what feel like bizarre market outcomes such as this.


As information that challenged a robust economy came out this year, investments that struggle in such times (e.g. small growth stocks) went down in price, while other investments (e.g. dividend stocks) held up better. This is precisely what you'd expect.


What you wouldn't expect is for prices to lag until some economist or pundit formally announces challenging times, or labels it a recession. Prices will always lead lagging information, and since there's no reliable way to forecast outcomes, humility is the hero. You want to own stocks that pay dividends, and stocks that don't pay dividends, alike. You don't want to guess whether it's a good time to own bonds, or a bad time.


Instead, you want a disciplined investment strategy that delivers predictable long-term outcomes as best as possible. It requires unwavering consistency to being decent in every type of unpredictable future market environment.


Otherwise, what if you're wrong? What if you're stuck with the disaster of a concentrated, incorrect portfolio bet? No matter how tempting it is to guess and take big swings, getting it wrong is precisely the undesirable outcome that empirical research tells us is likely.


Portfolio management is not like stardom.


You don't want to achieve greatness. It ain't the worth the cost.


End.

2/22

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