E266: J.P. Morgan CIO: Mistakes Top Investors Make
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This episode features Hamilton Reiner, Managing Director at JPMorgan Asset Management and CIO of the U.S. Core Equity Team, discussing how options can help investors stay invested through market volatility. The conversation explores how options serve as disciplinary tools rather than speculative instruments, enabling investors to navigate market storms while maintaining their long-term investment strategies. (00:38)
• Main theme: Using options strategically for portfolio construction and behavioral discipline, not speculation, to help investors stay invested during market volatility and improve long-term outcomes.
Speakers
Hamilton Reiner
Hamilton Reiner is Managing Director at JPMorgan Asset Management and CIO of the U.S. Core Equity Team, bringing over 35 years of experience investing in equities and equity options. He has been at JPMorgan since 2009, serving triple roles as CIO of their US core equity platform, portfolio manager on numerous strategies, and head of US equity derivatives within equity asset management. His career includes experiencing major market events from the 1987 crash through COVID-19, and he previously worked at Lehman Brothers where he lost his entire stock holdings during the 2008 financial crisis, an experience that shaped his approach to risk management.
Key Takeaways
Options Provide Precision, Not Just Leverage
Hamilton emphasizes that options are "magical" because they allow investors to express more precise views on securities beyond the simple linearity of traditional stock ownership. (00:38) Rather than using options for leverage or speculation, institutional investors can use them to create more nuanced investment strategies that align with specific market expectations. This precision allows investors to maintain market exposure while managing specific risks or generating income, making portfolio construction more sophisticated and tailored to individual risk tolerances and market views.
Stay Invested Through Hedging, Don't Try to Time Markets
The most critical insight from Hamilton's 37 years of experience is that the goal should be staying invested rather than trying to outsmart or time the market. (33:31) He learned that being right nine out of ten times in market timing can still result in being unprofitable overall because missing just a few key days can destroy years of gains. The solution is using hedged strategies and disciplined rebalancing to maintain investment exposure during market storms, allowing investors to benefit from long-term market growth without requiring heroic market timing abilities.
Seven of the Ten Best Market Days Occur Within Two Weeks of the Worst Days
Hamilton shares a compelling statistic that over the last 20 years, missing just the ten best market days would reduce returns from approximately 10.5% to 5.5% annually. (14:48) More importantly, seven of those ten best days occurred within two weeks of the ten worst days. This highlights why investors are most likely to make poor decisions precisely when staying invested matters most - during periods of high stress and volatility when emotions run highest and rational decision-making becomes most difficult.
Risk-Based Portfolio Construction Over Asset Allocation
Instead of starting with traditional asset allocation percentages, Hamilton advocates for beginning with risk tolerance and building portfolios to match that targeted risk profile. (25:54) This approach means that a high-return, high-volatility asset might actually be superior to a lower-return, lower-volatility asset, as long as position sizing accounts for the increased volatility. The key is ensuring investors can stay invested through market cycles by matching their portfolio's risk characteristics to their actual risk tolerance, not their perceived risk tolerance during good times.
Compounding Requires Staying in the Game
Hamilton illustrates the power of compounding through personal examples, including how his grandmother's $1,500 gift of ExxonMobil stock became worth over $160,000 through decades of dividend reinvestment. (41:21) He demonstrates that $200 invested at average equity returns over 30+ years becomes $3.2 million versus only $800 at 4% cash returns - a $2.4 million difference. The critical lesson is that compounding only works if investors stay invested through market volatility, making behavioral discipline and risk management more important than perfect market timing.
Statistics & Facts
- About 40% of Hamilton's client assets use options for hedging/downside protection, while 60% seek income generation strategies. (01:43) This distribution reflects the two primary institutional use cases for options beyond speculation.
- Over the last 20 years, missing just the ten best market days reduces returns from approximately 10.5% to 5.5% annually, and seven of those ten best days occurred within two weeks of the ten worst days. (14:48)
- Hamilton's personal example: $1,500 invested in ExxonMobil stock decades ago through his grandmother's gift is now worth over $160,000 through dividend reinvestment and compounding. (41:21) Additionally, $200 invested at average equity returns over 30+ years becomes $3.2 million versus $800 at 4% cash returns.
