Last Wednesday I began contemplating this Letter from Linlithgow.  Maybe you thought it just comes out the top of my head, but in reality a few ideas float around for days before something jumps out.  Having spent time with Ned Davis Research (NDR) stars Tim Hayes and Joe Kalish on a trip to London last Tuesday I thought “Misery” would make an interesting theme.  I’ll explain why shortly.

Then the shocking events in Paris on Friday night sealed it.  Apart from the utter horror we all felt at the senseless slaughter and maiming of hundreds of innocents by fanatical assassins, how would Stockmarkets react?  Headline writers in Sunday Times’ Business Section (on Sunday morning) were in no doubt, exclaiming “Paris attack rattles markets…….”  I wondered on Twitterland what markets were actually open for business at that point?  None.  Mmm.

In the article “experts” went on to predict markets would fall on Monday by 2.5%.

That led to me checking for precedents on my trusty NDR iPad App.  I remembered their study of the 51 crisis events that happened globally over the 110 years to 2013.  That’s one crisis roughly every 2 years would you believe.  First up was February 1907’s Economic Panic, and the last on their list was April 2013’s Boston Marathon Bombing.  So it excludes the Russian invasion of Ukraine last year.  But it includes crises as diverse as Pearl Harbour 1941, Suez Canal Crisis 1956, Arab Oil Embargo Oct 1973, Falkland Islands War 1982, Gulf War 1991, Madrid Terrorist Attacks 2004, and Lehman Brothers Collapse September 2008.  Plus of course 2 World Wars and the assassination of JFK.

What the figures show is an Average Reaction Day Fall in the Dow Jones Index of 2.9%.   And 9 months later an Average Increase of 16.9%.  So did markets fall as experts predicted?  Oddly enough the DJI rose 1.44% on Monday, while the FTSE managed a mere +0.76%.  Then encouraged by the US reaction it shot up 1.9% on Tuesday.  At the time of writing (Wednesday) the FTSE’s slipped 0.4%.  Not what was expected, although it’s still early days.

For perspective, have a guess when the first terrorist attack in New York took place.  A bomb attack planned to cause maximum fatalities and aimed at young adults just like last Friday in Paris.  Without warning, at lunchtime in Wall Street on the 16th September 1920, a bomb hidden on a horse drawn cart exploded.  30 died instantly, another 8 died later, hundreds more were injured, 143 of them seriously.  The blast caused, in today’s money $24 million in property damage.  It was blamed on Italian terrorists/anarchists.

So nothing changes.  Especially the resilience of people and financial markets.  The last 110 years is testament to that.  So…will Friday’s outrage in Paris derail the continuing Secular Bull Stockmarket run since March 2009?  Highly unlikely.  As legendary investor Sir John Templeton declared long ago…. “Bull Markets are born on Pessimism, Grow on Scepticism, Mature on Optimism and Die on Euphoria.”  If you see any optimism, never mind euphoria out there, do get in touch.  I’ll be amazed if my phone rings.

Did you know there’s a “Misery Index”?  What does it measure?  No…not Scottish Novembers.  It measures unhappiness.  Sounds like the same thing to me.  Wonder if they’re correlated?  Invented by US economists …surprise surprise….. it became “popular” during the 1970s decade of US high unemployment and inflation, a time of misery allegedly felt by millions.  Only an economist would link unhappiness and popular.

Well, now there’s Good news and Bad news.  The Good news is that right now the “Misery Index” is the lowest since 1956 when the majority were happy bunnies.  The Bad news?  Economists reckon we don’t realise how unhappy we really should be, compared to how we felt 59 years ago.  So there.

What are my own memories of 1956?  I remember my granny’s wee flat.  Upstairs with an outside toilet shared with the folks next door…the Smellies…that’s their surname not a description.  No electric light even in the toilet.  And no lock on the toilet door which explains why my family became great singers.  Inside, there was a living room roughly the size of Nelson Mandela’s cell, but crammed with so much second hand furniture it looked like a junk yard, plus a piano to encourage the singers.  Small scullery (a kitchen without any room to move) and one bedroom.  Gas mantles gave light.  One coal fire.  No double glazing.  Hot water sparingly provided via one tiny gas heater.  No bathroom.  No washing machine/tumbler dryer.  Not even a radio.  Bliss.

Despite the harsh environment, granny remained a staunch supporter of the Royal family.  She had a framed photo of them and in a corner of it a pic of me aged 3 on a tricycle.  Until I was 15 I thought I was fourth in line for the throne.  My two surviving aunts tell me that despite having little by way of comforts we take for granted today, they look back with fond memories.  Probably had a lot to do with not having TV, internet, iPhones and experts bombarding us with constant bad news.  Might even have been before economists were invented.

I read this week that Warren Buffett’s right hand man Charlie Munger, a billionaire these days, had a miserable time of it in the years before 1956.  In 1951 he and his wife divorced.  He lost everything.  Then he learned his son had leukemia.  There was no health insurance.  The death rate was 100%.  His son died in 1955.  Munger was broke, divorced and had buried his 9 year old son.  Munger said of Adversity… “Assume life will be really tough, and ask yourself if you can handle it.  If the answer’s yes, you’ve won.”

Judging by the reactions to repeated adversity over the last 110 years I’d say we can handle it alright.

And finally some thoughts on another Misery Index…the FTSE.  An increasing number of “experts” and investors believe, despite the poor performance of the FTSE over the last 20 years, that simply following “Passive Trackers” that track the FTSE Index , despite its deeply flawed Capital Weighted format is better than taking the time and trouble to source the best Active Fund Managers.  On the basis of what?  Cost apparently.  Cheap is good?  I try to remind them of Equitable Life, the darling of “experts” and commentators in the 1990s.  But to little avail.

As my granny always said all these years ago …. “Only settle for the best son.  And keep going”…..And that’s why we seek out the best investment managers and stick by them.  

So you can Dream The Dream.

Alan Steel
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This article is the personal view of Alan Steel. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.

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