Take care when you pass the investment baton
I want to break free – Freddie Mercury
Do you want to be a free man, or do you want to be a slave
Do you wanna wear these chains until you’re lying in your grave? – Van Morrison
New beginnings are often disguised as painful endings – Lao Tzu, Chinese Philosopher (6th Century BC)
Or is the other way round ‘n that? – Tse Chu Jimi, Scots/Chinese Philosopher (last week)
If you’d fallen into a coma on 1 January 2020 and didn’t wake up until early evening on Hogmanay and then checked your investment portfolio, you would’ve assumed it had been a fairly uneventful year.
Unless, of course, in December 2019 you’d read a Goldman Sachs opinion piece which pointed out that it had been almost 11 years since the last 20% correction in the US market, (a technical term for ‘Aw naw we’re doomed’) the longest such run in over 120 years. So by laws of average one must be overdue.
During 2019 the S&P500 Index, which is made up of the biggest US companies, had gone up 25% despite umpteen pessimists a year earlier advising investors to run for cover. An annual Christmas message from them, it seems. No idea, however, how many listened and so missed out on a stonking year.
However, we do know thanks to the December 2019 piece by Goldman Sachs that ‘retail investors’ (that’s folks like you and me) presumably taking heed of the gloomy experts’ warnings, and maybe having had it too good for a while had sold out in record numbers to flee to ‘safe’ bond funds and cash.
Was this a premonition of what proved to be an Annus Horribilis for most of us globally? Unless you’ve been in that coma I mentioned earlier you’ll be only too aware of what I’m referring to. For in March 2020, on the back of viral social and mainstream media coverage showing the Covid19 virus nightmare in China and Italy, stock markets went into what’s known in the business as a waterfall decline. I can think of a much more appropriate term, but it wouldn’t make it past the editor.
For investment headline writers the suddenness and depth of the fall in stock market indices must have been terrible. For them a 0.25% increase in interest rates has become a ‘hike’, a 1% fall in an index a ‘plunge’ and a 3% increase in an index just ‘a better day’, so what words would they consider appropriate for a 36% fall in the FTSE100 from January until the 23 March? Better not go there.
And perhaps it’s better not to go into what I think of the utter shambles caused also by the predictions made to governments by a bunch of mathematically inept scientists lacking expertise in immunology or epidemiology.
Suffice to say that economies have been battered, businesses have gone bust, jobs have been lost, and the suicide rate is exploding while media obsess over rising Covid cases, despite The Office of National Statistics confirming that only 377 people under age 60 died with the virus in the UK in the whole of 2020 .
That’s 377 out of more than 65 million! Thirteen times more poor souls committed suicide. And 655 died falling down the stairs. They’ll be banning two-storey houses next.
‘When the pain is unbearable that’s a sign that you should do nothing. Ride it out. Theory goes that you should take the brave pill and buy more. Aye right! I’m no that brave.’
2020 will be remembered as the year when well-known phrases or sayings vanished from our language … like ‘What did you get up to at the weekend?’ or ‘Where are you off to on holiday this year?’ I will remember it as the time when over a few weeks of lockdown my wife and I went over all the mistakes I had made over the last 21 years.
We are, however, where we are. Having been through at least five stock market hard crashes in my career I remembered that as an investor, when the pain is unbearable that’s a sign that you should do nothing. Ride it out. Theory goes that you should take the brave pill and buy more. Aye right! I’m no that brave.
It’s also the case that when you’re barred from going anywhere, some of us catch up on reading. I decided not to buy any newspapers since the middle of March, and I find the best invention ever is the mute button on the TV remote control. But reading the thoughts of successful long term investors and behavioural finance writers like Morgan Housel or Jason Zweig was really helpful.
I also recommend you read Terry Smith’s new book ‘Investing for Growth’. Terry manages Fundsmith. Luckily, I met him more than nine years ago just after he launched his fund. Doubled his investors’ money every four years. Great stuff.
As Terry asks, why not make money by only buying the best 30ish companies in the world? Companies who on average were formed almost 100 years ago. After all, look what they’ve been through over all that time. I also like the simplicity of his three part formula “Only buy shares in good companies, try not to overpay, and then do nothing.”
Stock market investors who did nothing during the extreme pain they felt from March onwards and invested in good companies have reaped astounding rewards. So what to do now? I’d say it’s wise to listen to what Terry has to say about it all. “They say life is a marathon not a sprint. So is investing”. Personally, I used to use an analogy to successful investing using the Grand National horse race with its gruelling course and fences.
Terry uses the actual Marathon as an analogy to investment, and asks whether 105 four hundred metre sprinters would be better than one marathon expert? But bearing in mind the sprinters have to pass over the baton, and if one dropped it or failed to pass it on inside the allowed zone, they’re disqualified. The equivalent in investment terms is that each time you switch strategy (pass the baton) you run the risk of failing completely.
Decent analogy too, I’d say, regarding the governments’ handling of Covid. Isn’t it time to pass the baton to a specialist trained for this Marathon?