The Long Arithmetic: Issue 9

Almost everyone who sold at the worst possible moment will tell you they had no choice. They are usually right.

The story we tell about bad selling is a story about nerve. Someone panicked, someone flinched, someone watched the number fall and could not sit still. That happens. But it is not what does most of the damage. Most of the damage comes from people who did not flinch at all. They sold because they needed the money, and the only money they could reach was the money that had gone down.

That is what selling at the wrong moment usually is: a decision made months or years earlier, when the money was arranged in a way that left no room for a bad stretch. By the time the bad stretch arrives, the important choice has already been made. The moment takes the blame, though the arranging is what did the damage.

This is what I see: the fix for selling at the wrong moment is structural, and you set it before the moment ever comes. Discipline summoned in the moment is too late by design. And the structure is duller than it sounds, which is probably why so few people build it.

Start with the plain version, because the phrase hides the mechanism.

Selling at the wrong moment means being a forced seller: needing cash at the exact time the thing you would have to sell is down, or cannot be sold at all without a discount. A holding that falls and later recovers costs you nothing, as long as you never had to sell it while it was down. The damage comes from the timing. You need the money at the exact moment it is hard to get out on decent terms.

Two things drive that collision, and neither is bad luck.

The first is sequence. While you are still adding money, the order of good and bad years barely matters, because you are not selling anything. Once you are drawing on the money, the order starts to matter a great deal. A bad stretch early, while you are pulling cash out, does damage that a later recovery cannot fully undo. Same average return, different order, very different result. (A reader named this after an earlier issue: it is the piece of "compounding works until it doesn't" that does the real damage, and he was right to name it.)

The second is liquidity, which is a plain question wearing a formal word: if you needed this money in 90 days, could you get it out, and on whose schedule? A public fund, yes, at whatever the price is that morning. A private deal, a rental, a syndication, usually no, or only by selling your stake early at a discount. Net worth does not answer it: you can be worth a great deal on paper and still be one stalled deal away from a forced sale.

Here is where the fix usually goes wrong, and it goes wrong before the bad year, in how people sort their money.

Most people sort by return. They ask what each dollar could earn and push as much as they can toward the things that earn most, which are almost always the things that are hardest to exit. It feels like making each dollar work harder. It quietly builds the exact condition that produces a forced sale: a lot of money committed, little of it reachable, and a life that will, at some point, need cash on a timeline it does not control.

Then the stretch comes. A deal that was supposed to return capital in 3 years goes quiet. I read versions of this from more than one reader recently: stalled investments, some of them foreclosed, and plans to sit "on the sidelines" for two or three years hoping to recoup, while the cash flow they had counted on thinned. None of them was careless. Each had sorted money by what it might return, and the return took longer than the life did.

The pressure runs the other way too. I watched a client become a forced seller by reaching for something good. They found a business worth buying, and the purchase was time-sensitive. The money to fund it sat in their stock portfolio, so they sold a large piece of it to make the deadline. The purchase clock set the timing. What the market was doing that week never came into it. That is a forced seller as well, even when the thing being reached for is a good one, because the timing belonged to the deal and not to them.

Discipline does not save you here because, by the time the moment arrives, it is not the variable anymore. If the only money you can reach is money that is down, willpower does not change that. You will either sell it or borrow against it, and both are the same forced move under another name. The choice that mattered was made earlier, when you decided how much of your money would be reachable at all.

So, the structural fix is a second sort, laid over the first. Before you ask what a dollar could earn, ask when you might need it. The two sorts together are the whole method.

This is how I evaluate it. Money splits, roughly, into three horizons. There is money you may need soon, inside the next year or two, for the life you are living and the surprises it will hand you. There is money you will need eventually but not soon, across the next several years. And there is money you are planning to leave alone for a long time, money that can sit through a full cycle without you touching it.

The rule that prevents forced selling is quick to state and uncomfortable to follow: the money in the first horizon does not belong in anything you can only exit at a loss or on someone else's schedule. It earns less, and that is the point. Its job is to make sure no single bad moment can reach the long-horizon money and force it out early. You are buying the ability to wait, and the ability to wait is what turns a drop into a paper loss instead of a realized one.

This is how my own near-term money is arranged. It sits in T-bills and a money market fund. Neither is there to excite me, and neither earns much. They are there because I can reach them on my own schedule, which means the long-horizon money is not the thing I have to touch when something comes up, whether the something is a need or an opportunity with a clock on it. The lower yield is the fee I pay for not being a forced seller.

I want to be honest about the other side, because a structure that only warns in one direction is a sales pitch. Holding too much in the reachable, low-earning bucket has a real cost too. It is a drag, and if the drag is large, it is usually fear dressed as prudence. There is no correct number here. It depends on how stable your income is, what you owe, and how you handle a bad year: a steady salary with few obligations can keep the reachable bucket thin, while drawing on your portfolio or carrying commitments that do not pause for a downturn calls for more. It is a conversation with an advisor who sees your whole picture, not a rule from a newsletter.

What the structure gives you is narrow but large: it removes the forced move. When the quiet stretch comes, and it will, the money you might need is not sitting inside the thing that went quiet. So, you get to do the hardest, most valuable thing available in a bad year, which is nothing, on purpose, because you arranged in advance for doing nothing to be possible.

The forced seller usually ran out of room long before the moment that gets the blame. Room is the thing to build, and it has to be built while things are still calm, because you cannot build it in the middle of needing it.

So, here is the question, and it comes before there is anything to sell in anger. Look at the money you might need in the next year or two. Then look at where it actually sits. If any of it is somewhere you could only reach by selling at a loss, or by waiting on a deal that keeps its own schedule, you have found the place a bad moment would force your hand. Fixing it now, while things are calm, is quieter than it sounds: it usually means shifting the part you might need soon, over time rather than overnight, into something you can reach on your own schedule, so the next bad stretch or sudden opportunity does not get to decide for you.

Reply and tell me where your near-term money is sitting, and whether looking at it this way changed what you saw. I read every reply.

Disclaimer: This is not financial advice. Consult your CPA or licensed advisor before acting on anything specific to your situation.

Until Monday.

Alina