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A Change Of Seasons

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by Paul Kindzia in Happiness, Health, Longevity, Personal Finance
October 14, 2022

It was Tuesday evening after Labor Day Weekend.  Most families in America were dragging as they had to return to work and school after a long holiday weekend.  My wife Angela and I were in another dimension.  The day seemed to last two seconds and two years simultaneously.

We had been caring for Angela’s mother, Mary Lee, for six years at that point.  Mary Lee was 87, suffered a stroke in January, and was placed on Hospice in August.  But this Tuesday wasn’t going to be like every other random Tuesday over the past few decades.  This was the final Tuesday.  It was the last day.  She passed just before 7:00 pm at home with Angela and me and the dogs.

She was able to pass away peacefully on her own terms, in a quiet and familiar room at our house.  She went out in the most favorable conditions, watching the Golden Girls on the Hallmark Channel in the background with the dogs and my wife and me nearby.  I thought, “Wow, this is what winning looks like when it matters most.”

I noticed that in the final season of life, luxury cars didn’t matter.  Mansions didn’t matter.  Built-in swimming pools didn’t matter.  What the president said or critics said didn’t matter.  I can assure you during the final season of life, a sense of fashion didn’t matter either.

Some of us may or may not have the opportunity to live that final season of life in the comfort of a private room at home.  If we haven’t thought about that, it may be an excellent time to start thinking about it.  What would it cost to live your final season of life in various scenarios?  What are your options?  What will matter to you?  What is your plan and backup plan?

Back up another season of life.  For many, this season will be the glory years of life.  Maybe for you, it will be between the ages of 55 and 75 years old.  You have plenty of worldly wisdom and experience.  You should no longer be a dummy on some issues.  Your career is winding down or may be behind you.  What will it cost to live your glory season of life?  What are your options?  What will matter to you?  How much are you financially preparing for the next season of life that comes afterward?

Back up another season of life.  For most, this season is the busiest and most uncertain.  You are between 35 and 55 years old.  Earnings count because the level of spending is high.  You are very productive and experienced at work and work plenty of hours.  You are also raising kids, buying cars, saving for college and weddings.  You need bigger houses and more furniture.  You take your health for granted.  Time controls you rather than you controlling your time.  You don’t have enough time for everything, but you often try to do everything.  You only back off when you get exhausted.  What will it cost to live your busy season of life?  What are your options?  What will matter to you?  How much are you financially preparing for the next season of life that comes next?

Back up another season of life.  You are between 21 and 35 years old.  You often don’t even know what you want to be when you grow up.  You panic about this, only to realize that decades later you still don’t know what you want to be when you grow up.  You think you know more than you do.  You take your health for granted.  You never have enough money to satisfy your consumption desires.  Your want list is always a mile long.  You believe that you have all the time in the world to figure things out and try new things.  You seem crunched for time, yet you spend time playing games, goofing around with friends, and participating in physical activities.  You can stay up past midnight, and I hate you for that.  You still believe that someway/somehow, you are going to own a private jet and buy your own island once you figure out how to be rich and famous.  In the meantime, you take advice from people on social media about how to play the crypto markets and invest in meme stocks.  You believe the government should pay off your student loans because you think that the student loans are what is locking you down in your parent’s basement.  What will it cost to live this season of life?  What are your options?  What will matter to you?  How much are you financially preparing for the next season of life?

What Is Happiness?

What is happiness?  I don’t know.  It’s slippery.  It’s fleeting.  It’s here one moment and gone the next.  Here’s what I think I know after doing this job for three decades and observing so many others during their journeys through multiple seasons of life.  I’ve learned to invert the issue.  I may not know precisely how to be happy 24 hours a day, seven days a week, and 365 days a year.  But I know what happiness isn’t.  Being unhealthy or having health problems doesn’t lend itself to happiness.  It may be fun doing things to ourselves on the path to unhealthy, but once you get to an unhealthy state, you don’t arrive at happiness.  Your health is worth a big investment.

Lacking control over your time doesn’t lead to happiness.  You may have a high-paying job.  You may be powerful.  Popular people may surround you.  But if you lack control over your time, it doesn’t lead to happiness.  Learning to control your time is worth the investment.

Having poor-quality relationships doesn’t lead to happiness.  It doesn’t lead to happiness if you are always arguing with people and battling with family, friends, co-workers, neighbors, and total strangers.  Loving relationships matter.  They are worth investing in.

So, to summarize, there is a much greater chance of achieving lasting happiness if:

  • You are healthy
  • You have control over your time
  • You have quality and loving relationships in your life

Our hobbies, friends, jobs, and activities change over time.  What you do beyond these factors will change over time.  One day you will like running and playing video games.  Next, you like doing yoga and camping.

Financial security and resources can aid in these three primary objectives.  It’s not about buying mansions, driving Ferrari’s and traveling on private jets.  That’s not to say that those can’t be enjoyable.  They probably are (I don’t know because I don’t live in a mansion, drive a Ferrari, and travel on a private jet.).  But as I age and observe others moving through seasons of life, these primary objectives seem to be common denominators of happiness that are worth striving for.

Money isn’t the end goal.  Money can provide the resources that aid us in being healthy, controlling our time, and having quality relationships.  Traveling with family and friends to cool destinations is much more fun than sharing space under an overpass when it’s raining outside.  Sure, you can lift rocks outside to stay in shape, but a membership to a health club is better if you ask me.  Buying gifts for loved ones and donating money to worthwhile causes brings joy but costs money.  Money enhances our experiences as we go through the seasons of life.

Stay focused on the primary drivers of happiness, and you’ll probably start making better financial decisions.  You will live a higher quality of life with less stress and anxiety.  In the end, it’s not that complicated.  We make it more complex than it has to be.

Valuation Updates

Valuations are certainly moving in the right direction (DOWNWARD!).  After years of bubble conditions that peaked at the end of 2021, this year has undoubtedly been the year that the extreme exuberance has exited the markets bringing with it painful and expensive losses for most investors that continued to chase the risk.

We learn from history that valuations do not matter until they absolutely matter.  And investors are being delivered a harsh wake-up call to this reality of investing.  As Warren Buffett is often quoted as saying, “In the short-run, the market is a voting machine.  But in the long run, the market is a weighing machine.” The scale to do the weighing always returns to the earnings and cash flows of the underlying businesses.  If the valuations deviate from those earnings-related fundamentals, you can be assured that they will revert back to their rightful values at some point over time.

(Chart courtesy of Jill Mislinski at Advisor Perspectives)

When we look back on the history of valuations in the equity markets, we can see that stocks trade in a valuation range for the most part.  In mathematical terms, we can see that those levels generally stay within one standard deviation from the long-term mean of the markets.  In rare occurrences, we can see those market valuations exceeded this one standard deviation threshold a few times.  The first was in 1929 (right before the epic market crash of 1929 that was the lead-in to the Great Depression.).  As a reminder, once the markets cracked in 1929, it would take 24 ½ years before the indexes regained their previous highs (The year was 1954).

When we hear sayings like, “Yeah, but stocks always go up in the long-term, it’s crucial that you clearly understand what “long-term” means and how that could relate to YOUR investment horizon.  Lost decades can happen in markets, so blindly following investment axioms could prove quite costly in your individual lifetime.

We exceeded the one standard deviation range in the late 1990s during the Tech Bubble.  After the Tech Bubble burst, the NASDAQ 100 fell 82%, with many individual stocks closing their doors and filing for bankruptcy.

Looking back at the chart above, we can see the average of four common valuation metrics that markets are still 98% above the long-term mean valuations.  Equally interesting to me as a risk manager is that the level of over-valuation before the global economic meltdown of 2008-2009 was 63%.  We still have a way to go to get back to the extreme levels that preceded the global financial collapse, which brought the S&P500 down more than 50%.

This bubble is unique because it has often been described as “The Everything Bubble.” now, for investors that have blindly invested and chased returns in the markets during this recent bubble, the recent losses have been painful and damaging.  Most major asset classes and sectors are being repriced sharply downward; Stocks, Bonds, Real Estate, Private Equity, Venture Capital, and precious metals are being significantly impacted.  There have been no hiding places in risk assets. Good old-fashioned cash is the only “safe” hiding place in 2022 that has been void of large losses and/or significant volatility.

We know that holding long-term cash is a losing proposition, especially in significant inflationary times.  The long-term strategy is not to hold cash but rather to execute our strategy of building up massive cash reserves that will be redeployed on the backside of this bear market.

The most attractive investment opportunities arise on the backside of significant bear markets as investors over-correct from extreme greed to extreme fear.  Investors are forced to liquidate their positions for either liquidity or emotional pressures.  At a certain point, when losses get to certain maximum pain thresholds, investors throw in the towel and liquidate at the worst times because the psychological damage of holding becomes unbearable and depressing.  This is only compounded if investors are forced to sell because they need liquidity due to job losses or need to pay their debts during a recession.

Everything appears to be playing out for a significant revision in equity valuations.  This is fantastic news for value investors who are disciplined in their approach to buying quality assets at reasonable prices (or better yet – excellent prices.)

We still have a way to go before overall valuations become “reasonable” (or just average).  We also don’t know if markets will fall below valuation averages for some time like they have done in other cycles.  After all, if we know what the average of something is, it implies that at certain times things will be above average, and at other times things will be below average.

It’s no different than the temperature during a season.  Suppose we know the average temperature in Atlanta during the fall is 62 degrees.  It may get to 88 degrees in November, but it may get to 28 degrees that same month.  In that case, there will be times when the temperatures will be above 62 degrees and times when the temperatures will be below 62 degrees.

We know that the temperature of financial markets has changed significantly in only nine months.  The mood has shifted as reality has set in.  The froth has exited the building.  Long gone are the reckless bets being made in meme stocks, cryptocurrencies, commercial real estate, technology stocks, private equity and venture capital.

Global markets are moving into recessionary times.  Interest rates are rising.  Inflation has become a stubborn and difficult problem to control.  Valuations are being pulled back down from gravity.  Political and social pressures are mounting.  The debt levels built up over the past decades appear to have reached peak levels (but I never doubt our abilities to borrow even more).  Central banks are forced to tighten monetary policies causing more pain worldwide, especially for those in debt.

What is horrible news for some is happy news for others.  It all depends on your investing style and strategies.

In the meantime, I’m increasingly optimistic that the world is finally returning to sanity from a financial perspective.  It’s finally time to pay the piper after years of excesses and fake wealth creation.  There is no free lunch in economics.  You can’t print your way to prosperity.  Eventually, things always return to productivity and fundamentals.

Meanwhile, we have an entire generation of investors who have never experienced a real bear market while their savings are at stake.  They are learning that they have confused brains for a bull market and that what worked during a bubble is the same strategy that will smash them in the follow-up bear market reversal.

We are moving in the right direction, and I am excited about what should lie ahead as we get into 2023 and beyond.

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