Surviving the Bear

Share

By Jean Strock – 07 October 2022

It has been a grim year in investment markets where overcooked asset prices have rapidly deflated.

No asset class has been spared. We expect equities to be volatile but bonds, which theoretically cushion us through equity sell offs, have added to the pain. Property prices are also correcting.

Add to that a long wet winter, war and spiraling prices and it is easy to feel discouraged about investing.

Financial Advisers are not immune to the behavioural biases experienced by clients. Doubt can creep in after months of sustained falls in portfolio valuations and difficult conversations about when things are going to improve.

Morgan Housel’s 2020 book The Psychology of Money is doing the rounds of the Auckland office and has helped us remain focused and optimistic. Housel’s very readable book maintains that the main ingredient in financial success is your relationship with money and that how you behave is more important than what you know.

“You can build wealth without a high income but you have no chance of building wealth without a high savings rate. It is clear which one matters more.”

A related point is the importance of compounding and time when investing. Housel gives the example of Warren Buffett. Buffett is clearly a skillful investor but the key to his success is that he has been investing for 75 years.

“$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday”

Buffett built a solid base by the age of thirty and then allowed time to compound his success. Housel observes that good investing is not about getting the highest returns but rather getting pretty good returns that you can stick with for the longest period of time. A margin for error is a key point as this avoids having to sell investments at a suboptimal time and allows you to remain invested and let compounding work its magic.

A very relevant chapter during this time of war and pestilence deals with the seduction of pessimism and how pervasive it is. Progress tends to be slow while setbacks and disasters occur quickly and with great impact. Bad news sells and so this is what the media focuses on. We extrapolate present problems and trends without accounting for human innovation and our ability to solve these problems. We focus so much on the gloom and doom to notice the world is a better place on so many levels. 

This is the key theme of Hans Rosling’s 2018 book Factfulness: Ten Reasons we are Wrong About the World – and Why Things are Better Than You Think.

Whether it be infant mortality, life expectancy, GDP per capita, death from heart disease or car crashes, a lot of things in the world are better than they used to be but these gains are small and incremental so go unnoticed.

Back to investing; Morningstar have released their Q4 market outlook for the USA noting that US equities are trading into undervalued territory with a 20% discount to fair value.

 ‘Near term dynamics appear ugly, but valuations provide a large margin of safety’.

Morningstar expects the Federal Reserve to conclude its tightening policy by the end of 2022. Inflation will subside into 2023 with the Fed shifting to an easing mode in mid to late 2023 and economic growth rebounding in 2024.

There have been 11 economic cycles since 1950, culminating in a recession lasting ten months on average. Share markets tend to lead economic cycles by 6 to 7 months in both directions and the strongest returns can occur after the market hits the bottom and before the economic cycle ends.

This is when time in the market and staying invested throughout provides the greatest payoff. One of our most important roles as Financial Advisers is to help you stay the course.

 

The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances.