The 10th Man

The F9 Problem

May 23, 2019

When you check your brokerage statement, how does it make you feel?

If it’s up since the last time you looked, it probably feels pretty good.

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If it’s down, it makes you feel bad.

People don’t like to feel bad, so if the market has been going down for a while and they think they’re losing money, they’ll stop checking it.

If the market has been going up for a while, they’ll check it every day. In fact, most people will check it multiple times a day.

For all the spreadsheet jockeys out there, you know that if you press the “F9” key then it recalculates the spreadsheet. Believe it or not, most P&L systems at banks are actually built within complex Excel spreadsheets. You can have the sheet automatically recalc with real-time data, or you can just recalc it when you feel like it by pressing F9.

When I was a trader, I noticed that I pressed F9 a lot more on good days than on bad days. On terrible days I would absolutely dread pressing the F9 key. On great days I was pressing it 3 times a second.

Over time, I began to think of this as The F9 Problem, where you have to figure out the periodicity in which you check your P&L.

On one hand, maybe you think that pressing it every second is a good thing, but more information isn’t necessarily better. More information can lead to worse decisions. That is an argument for checking it infrequently.

But on the other hand, sometimes you need to know how bad the damage is so you can take corrective action. You can’t stick your head in the sand, because most problems don’t get better if you ignore them. If you do this, you are no better than the retail investor who leaves his monthly statements on the counter unopened.

What is the answer?

     
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Periodicity

Michael Batnick, director of research at Ritholtz Wealth Management, published an important finding a few weeks ago on Twitter. He noted that if a hypothetical investor were to check his P&L on a daily basis, there would be a 46% chance that he would show a loss.

But if he were to check his P&L once a year, there would only be a 26% chance that he would show a loss (because markets go up over time).

The goal here is to stay invested and continue compounding, and if you are regularly showing losses, you are more likely to get frustrated and liquidate your investment—and stop compounding. Which would be catastrophic.

Like I said, this is an important finding. It argues strongly for looking at your P&L less frequently.

But there’s a sweet spot—if you look at it too infrequently, you may miss an opportunity to change your asset allocation. Market-timing is not the answer for the vast majority of investors, but I do think that there are one, maybe two times in your investing career that might argue for a sizable shift in your investment mix.

My answer? Something in the middle, which is about what I do. Don’t turn off paper statements! Get them delivered to your house, and when they come, open them. But don’t log onto the website. Once a month should balance the competing concerns of having too much negative feedback, versus willful ignorance. Before the internet, people did just fine with monthly statements.

Bigger Implications

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There are bigger implications to the F9 problem.

Everyone loves private equity (and venture capital) nowadays. Which is weird. People have come up with reasons why private equity tends to outperform public equity, such as the small firm effect (the theory that smaller companies outperform larger companies), the illiquidity premium and stuff like that, but they’re kind of bogus.

I will tell you the reason everyone loves private equity.

Because they lock up your money for 10 years!

Imagine you could log onto a website and watch your private equity fund tick second-by-second, like a stock. Imagine they gave you quarterly liquidity. You would be out of it in a second. But you literally can’t get your money back for 10 years, so you don’t worry about it. There aren’t too many 10-year-periods in history where the stock market shows a loss, so you are probably going to be happy at the end.

That’s it! That’s the only advantage. You can’t F9 your private equity investment. Unlike a hedge fund, which offers quarterly liquidity—if the fund is down 80 basis points over the quarter, then allocators are pulling hundreds of millions of dollars. Hedge funds just cannot compete with other alternative investments on these terms. And they won’t be able to, unless they start instituting lockups.

I personally don’t think a lockup of 3, 5, or 10 years on a hedge fund is unreasonable. A hedge fund manager is free to take different risks if they don’t have to constantly worry about getting their assets yanked.

The takeaway here is that you should not be afraid of illiquid investments. I am not a big fan of passive income (especially at these valuations), but fear the valuations, not the illiquidity—especially if you are pretty sure you are not going to need the money.

Being a capital markets guy by trade, I have always been leery of situations in which it is difficult to get my money out (I used to brag that I could be out of my entire portfolio in 5 minutes), but I am getting used to the idea.

It is hard to F9 your rental house, or your gas station, or your laundromat. If you hold it for 10 years, there is a pretty good chance you are going to make money on it.

Of course, the ultimate illiquid investment is your retirement account, for which you must pay an early withdrawal penalty. Consequently, don’t dwell on the daily performance of your retirement account. And for heaven’s sake, don’t get yourself in a position where you might have to withdraw from it and pay the penalty.

Don’t check your account every day. Check it every month. But make sure you check it, no matter what surprises you think may await you.

Jared Dillian
Jared Dillian

 

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