What a 1,000 year old Japanese mochi store would tell us.
Hiroko Masuike/The New York Times
Global stocks are up almost 10% since mid-June. Bond funds have also recovered, and investors are finally getting some welcome sighs of relief.
But with this year's volatility and the continued economic headwinds, given the recent rally, you might be wondering: should I cash in a little bit, and take some chips off the table?
It's not unreasonable to wonder. So far it's been a lousy year, even for investors who are doing it the right way. Plus there's no guarantee that stocks and/or bonds won't go right back down sometime soon. Why not lock in some of these gains in case they do?
Because when it comes to investing, if you're wondering, you're acting like a human.
The best investors don't wonder. They don't even make decisions.
And before I unpack that, and why 2022 has been a particularly complex year to avoid both wondering and decision-making, I want to tell you about Naomi.
Hiroko Masuike/The New York Times
Naomi Hasegawa is the operator at Ichiwa, in Kyoto, Japan. Her family started this business selling rice cakes, called mochi, years ago.
More precisely, 1,000 years ago. One of the most surprising parts of Ichiwa's story is that this isn't rare in Japan. There are over 33,000 companies here that are over 100 years old, which is more than 40% of all global companies in that age bracket.
Moreover — over 140 companies here are over 500 years old. With one of highest life expectancies in the world, longevity in Japan isn't just for humans. It's a cultural heritage.
And in late 2021, deep in the belly of Covid, Naomi's business acumen, operational philosophy, and guiding principles were on full display in this NYT profile by Ben Dooley and Hisako Ueno.
Imagine handling the uncertainty of a limited offering, tourist-dependent, 1,000-year old rice cake business, everyday carrying the weight of your family's history and legacy.
Kenji Matsuoka, a professor at Ryukoku University in Kyoto, studies companies like Ichiwa:
“Their No. 1 priority is carrying on. Each generation is like a runner in a relay race. What’s important is passing the baton.”
Here's what's going on with corporate longevity in Japan, per Naomi:
To survive for a millennium, Ms. Hasegawa said, a business cannot just chase profits. It has to have a higher purpose.
In additional to taking care of employees and supporting the local community, Ichiwa's higher purpose has been, for 1,000 years, to serve travelers the best mochi.
It's why you can't order anything else. Just mochi. And if you want something to drink, you are offered roasted green tea, but nothing else. Nothing else is available. Ichiwa doesn't make decisions, they just make mochi.
Hiroko Masuike/The New York Times
Covid has been tough on small businesses, and Ichiwa hasn't been immune. To survive, a company like Ichiwa might add items to the menu, or deliver a more modern experience. Even Uber Eats approached Naomi about setting up deliveries.
But Ichiwa would prefer not to evolve. While this surprised me, it may not surprise those with knowledge of Japanese business traditions. According to the authors, doing one thing — and doing it well — culturally, is very Japanese.
And so we can wonder whether Ichiwa could increase revenues, improve profit margins, expand locations, etc...or we can accept that they've set up a system where they only try to do one thing really well, which is both their business and legacy.
Ichiwa knows who Ichiwa is.
It's not that only making great mochi is necessarily the right way to do business, it's just the business that Ichiwa has decided to run for 1,000 years. And in simply knowing thyself, there are no unnecessary risks or peripheral activities to pursue things that aren't part of the mission. The mission is mochi.
Does your portfolio know what it is?
Taking some chips off the table after our portfolios recover is incredibly enticing. One of the main reasons is mental accounting: we create two separate portfolios in our head.
There is the BIG, long-term portfolio we've been managing, that's had a tough year; then there's the SMALL, short-term, sidecar trades we might make. If you took some chips off the table — let's say you sold some stocks to buy some bonds, or sold some bonds to move into cash — you still only have one total portfolio, but in your head it's compartmentalized into this BIG "long-term strategy" and the LITTLE trades that felt nice because the market had recovered a bit.
But there's a conundrum. If BIG does well, you say — gee, can't believe 2022 turned around like it did! Made all my money back! What do you care about your smaller trades not turning out great if the rest of your portfolio is on track after a year like this?
If SMALL does well, which means markets went back down, you say — gee, glad I traded a bit, otherwise I would have just sat there the whole time and never took any chips off the table! I saved myself some money.
You'll find a way to rationalize feeling good about the outcome.
Yet portfolios are not tools to help us rationalize trades we want to make. Portfolios are tools to live better lives, and should pursue the highest probability of allowing us to do so.
Letting portfolio movements (like the recent rally) determine your comfort level, and then adding or taking off risk, is a backward methodology. You need to have a well-defined risk profile you're comfortable with, and accountable to maintaining, before the risk ever actually shows up.
That risk profile informs your portfolio design, not vice versa.
The decision-making of whether or not to make trades, like locking in portfolio gains, needs to be made in advance of the opportunity actually presenting itself. Whether you do this on your own, or work with a financial planner, the goal is easy: determine the amount of risk you should be taking...to pursue the returns you can achieve...to live the life you want.
Eventually, that gets spit out into a thoughtful, weighted assortment of assets like stocks, bonds, cash, real estate, etc...
Let's take a basic example. You run a financial plan and it's determined that you should own 70% stocks & 30% bonds.
Because assets drift, you then build some bands around these numbers, like say you're willing to let stocks drift up to 80% or down to 60%. As the market moves and these asset percentages get imbalanced over time, it is the bands that will make decisions for you. If stocks do poorly and bonds do well, and your split is now 55% stocks and 45% bonds, then you are out of whack and need to rebalance.
But you don't decide you're out of whack; the decision has nothing to do with discomfort (though it may be uncomfortable). You just decide to be a systematic investor, and then later you rebalance because the tolerance bands were breached, which is the signal to rebalance. You don't let market volatility, whims, hunches, fear or greed convince you that there are new decisions to be made. You just execute.
And yes, sometimes, this system will call for taking chips off the table (I'm not against taking profits! I'm just against letting humans disturb successful investing).
As the manager of your portfolio, you should do one thing really well, and it's to be a methodical implementer of a predesigned plan.
On expectation (and a main reason why investors own both stocks and bonds), bonds should be a buffer for you when stocks go down. The tradeoff is that they won't typically keep pace if stocks move strongly upward.
On a long time horizon, you'll see that the spread between stocks (dark blue) and bonds (light blue) both widens and narrows through time, allowing that rebalancing opportunity. Here is back to 1996:
Sometimes, as the spread narrows (and dark blue moves downward to touch light blue), or even inverts, you'd have been able to buy stocks when they were relatively low, and sell bonds when they were relatively high (e.g. 2008, 2020); other times, you might be "taking chips off the table" by capturing profits as the spread widens again, and selling stocks relatively high to buy bonds relatively low (e.g. 2007, 2018, 2021).
The more white space that exists between the lines, the more stretched the differences, and the better the opportunity to rebalance.
I probably don't need to remind readers that these are ideal investing methods: buying low and selling high.
But in 2022, the paths look similar, and the ranges have been very narrow:
The result has been that because both assets have spent most of the year going down together, and then recently going up together, the balance between them hasn't deviated much. There haven't been many chances to rebalance.
This is why 2022 was a complex year for investors who like to wonder and make decisions on the fly. It's not obvious what to do, and the risk is that you feel like you need to do something. Taking some chips off the table feels reasonable. If you're anxious to do something, the market rally almost feels serendipitous.
And if you are a methodical, systematic investor, it has been tiresome waiting for the signals. Nonetheless, it is deviations away from our risk tolerances that should determine portfolio activity, not fluctuations in our overall portfolio value. We shouldn't trade just because we're bored.
And I get it — you still might be thinking, ah what the heck, why not just take a little off the table, and lock in some profits? It can't impact that much. This Rubin guy is harsh.
It's not just Rubin. It's also Naomi. When you focus on doing one thing really well, you won't make mistakes dallying in other things that don't add value. Arbitrarily taking chips off the table is not a long-term, robust investment strategy. It's a distraction, and one with complex mental gymnastics that may make you feel like you're being productive.
On expectation — because of their characteristics — stock and bond market returns deviate from each other to provide rebalancing opportunities. It hasn't happened recently, but that's okay.
It will happen again at some point. You will get the signal to buy whatever is relatively low, and sell whatever is relatively high. That's a robust strategy.
So wait. Be a patient, wonder-less, decision-less investor.
Don't let your boredom overwhelm your discipline. Lest you'll end up being either a crappy long-term investor, or a crappy short-term trader.
As the saying goes...
二鬼在追了者一鬼在屯得求
If you run after two hares, you will catch neither.
So just do the one thing really well.
End. 🐇