Holding back the years
“Our minds are bombarded with ideas and thoughts planted with the
avowed purpose of influencing us. We have little conception of the amount
of news that is manufactured”
“I have observed that not the man who hopes when others despair,
but the man who despairs when others hope is admired by a large
class of persons as a sage”
“Only pessimism sounds profound. Optimism sounds superficial”
“For reasons I have never understood, people like to hear
that the world is going to hell”
“We have fallen upon evil times, politics is corrupt and our social fabric is fraying”
This month let’s start with a quiz. All you have to do, without cheating please, is have a guess when the above 5 quotes were made. At the end of the Letter I’ll show the dates and the authors.
Shortly after the first fortnight in January I noted in my LfL that the dismal brigade, despite their New Year Resolutions to be cheery for a change, already were back to predicting doom every five minutes. Can you remember why? Well here’s a quick reminder - they foresaw an imminent war between Trump and Iran, another global recession and yet more China tariff problems not to mention climate change. Suddenly gold and oil prices surged and we were all advised to dump “overvalued shares” and rush to “safety.”
Next thing what was rising fell, and vice versa. I posed the question “what crisis will they come up with next?” Didn’t have long to wait. A mere fourteen days later we had the answer - Coronavirus. Their kneejerk response was typical. The sky was falling down and the Henny-Pennys and Turkey-Lurkeys panicked as usual, making poor investment decisions, just like Foxy-Woxy hoped they would.
Now please don’t get me wrong. I’m not saying that this latest virus is to be taken lightly. But rather than knee jerking into sudden emotional purchases of what’s popular with pessimists, wouldn’t it make sense to quietly study what happened at similar times in the past? And to recognise that any investment decisions made on the spur of the moment have a habit of turning out badly?
Interestingly a study by our friends at Ned Davis Research found that in each of the previous eight global virus scares since Ebola in 1976, stock markets bottomed on the very day the World Health Organisation announced the emergency. Ah, but I hear you say, this one is much more serious thanks to globalisation. But guess what? That’s what happened this time too. And since that day, stock markets have continued in an upward direction, much to the bewilderment of Henny-Penny.
This latest virus scare coincided with work I’m doing reviewing all my writings since ASAM was founded in 1975. And the reason for that is we’re planning to publish a “book” this Summer to celebrate our Sapphire Anniversary by pulling together 45 nuggets from Letters from Linlithgow; articles I’ve written over the years, quotes/predictions made publicly in the media and from presentations made since 2002 when I delivered my first “Economic Tricks the Ibiza Mix” to a previously despondent Mail On Sunday international conference in Barcelona.
The year after ASAM was founded the Ebola virus rocked stockmarkets. It had a 40% fatality rate with over 13,500 deaths. And it came along as confidence was still low, thanks to the stock market crash of 1973/75 when the UK index fell over 70%. In 1981 along came AIDS to further undermine investor confidence which was still weak. It’s hard to believe, but a fresh Bull Market began in 1982 and rolled along until the Dotcom bust in 2000. And that’s despite an estimated 1.1 million deaths from AIDS worldwide. (To end of 2018).
In late 2002 at just the wrong time for investors rocked by the Dotcom crash; 9/11 and the subsequent Gulf War; along came SARS with its 9.6% fatality rate. To be fair, Coronavirus appears more contagious and has affected far more people than SARS, but so far the fatality rate is around 2%. And the sky hasn’t fallen down yet, as confirmed in an email from Turkey-Lurkey.
Some further perspectives are worth mentioning. In late 2002 pessimists were in their element. Here’s what “specialist US investment house Prudent Bear” had to say - “Once investors realise that equities are producing returns substantially lower than they expect, the savings rate will rise. This in turn will curtail the spending spree that US consumers have enjoyed, with obvious repercussions throughout the economy.” Anybody else think their name gave away a tendency to pessimism? Interestingly the total return of the Dow Jones Index since then is at the rate of 10% pa, doubling US equity investor returns every 7 years, despite the 2008/9 Great Financial Crisis.
In late February 2009 I was asked to write why I was confident about stock markets following that financial crisis. You may recall yet another virus – Swine Flu further hit investor confidence at the time. I was in a superficial optimistic minority of one that the Daily Telegraph could find. Despite all the various headline warnings since quoting pessimists, the total return of the Dow Jones Index to the end of January is 15.7% pa, doubling returns of superficial optimists every four and a half years.
Actually since 1770 there’s only been one decade when the US has had no recession – the one that’s just ended. Fact. Nobel Prize winning economist Robert Shiller predicted in November 2012 “another lost decade for US stocks.” Fact (but wrong). In fact on the 11th of February the US market hit a new all-time record for the 270th time since April 2013, despite there being 59 occasions in only the last 5 years when stocks fell by more than 1.5% on a day. The last one was thanks to Coronavirus fears.
This week it was announced that 2019 was the lowest year for a decade for sales of equity ISAs “as political uncertainty gripped the market.” Apparently net sales were the lowest since 2008/9 “at the height of the financial crisis.” (A perfect time to Buy). No mention that 2018 was a poor year for stock markets so pundits expected more of the same. Carl Richards does lovely simple drawings which sum up investor behaviour. A favourite or ours is “Greed/Buy. Fear/Sell. Repeat Until Broke.”
Now guess what media comments were regarding ISA sales in the so-called “ISA Season” in March 2002? “It is obvious that sales have been a grave disappointment, down between 40% and 50% on the previous tax year.” And what was their considered conclusion? “From an investor’s point of view, it is obvious that stock market uncertainty makes equities an unappealing investment.” There you go. Investor behaviour hasn’t changed. Somehow we must be prepared to shake ourselves down after disappointing short term returns and play the long game.
And now to the quiz answers:
- Humphrey B Neill, Contrarian Investor, 1954
- John Stuart Mill, British philosopher, 1866
- Teresa Amabile, Harvard Professor, 2011
- Deirdre McCloskey, Historian, 2016
- Unknown author, but discovered on a stone in a museum in Constantinople by an archaeologist, and dated from 3800 BC. (Some things never change, eh?)