Investing is a funny endeavour.
If scientists pursued their craft the way many investors do, I think they’d probably ‘discover’ gravity about once a decade or so.
No, I’m not talking about every investor, and probably (hopefully!) not you, dear reader.
But I woke up this morning to the AFR headline:
“ASX to drop 1pc in global sell-off”
1. As I tweeted only last week, the ASX futures can be woefully wrong. Last Thursday’s pre-market headline was “ASX poised to open lower”. Six hours later, the headline was “ASX roars to new record as blue chips surge”
2. The stupidly (and I use that term not derisively, but to point out the folly of the approach) short-term approach of investors is maddening.
Apparently, US markets were down overnight because of the continuation of the Coronavirus outbreak in China, and with new cases being reported around the world.
Now, first things first: there are always more important things than investing. People are getting sick, and some are losing their lives. There might be many more before the outbreak is contained. That is a human tragedy that is far more important than what the market does.
(But, shares keep trading, and, as investors, we’re impacted by the market’s movements. So, as an investing business, we’ll focus on the ‘so what’ of these types of events.)
The thing is, as investors, we’ve been here before.
As I said, it can feel like the equivalent of scientists waking up one day and saying “You know what, I think there’s a reason that apples fall to the ground. I think it’s gravity!”.
Except that scientists don’t engage in this sort of global amnesia.
If you’re in your early-mid 20s, you might — might — be excused for not knowing how this sort of thing plays out. In your lived experience, all you have known is broadly rising markets (though November and December of 2018 should have given you something of a trial run).
The rest of us have no excuse. Here’s why:
The year was 2003.
The health concern was SARS — Severe Acute Respiratory Syndrome.
Unfortunately, it went on to kill 770 people, mostly in Asia.
For health professionals, SARS is a useful benchmark from which to learn about how to appropriately respond to such an unexpected, widespread and deadly outbreak.
To their credit, from what I know, they’ve done exactly that.
The lesson from SARS was that we made much ado — financially-speaking, at least — about nothing.
This, from Benzinga, via Yahoo! Finance:
“During the peak of the SARS scare from December 2002 to April 2003, the S&P 500 dropped 8.3% and stocks related to discretionary spending and emerging markets (particularly China) underperformed. At the same time, the price of gold jumped 4.8%.”
That’s what investors seem to have ‘learned’, if anything, from SARS: throw the toys out of the cot.
The very next sentence of that article is what they should be focused on, instead:
“The good news is that over the next six months after the scare, the S&P 500 more than made up for its losses, gaining 18.6%.”
Am I predicting some sort of post-SARS bull run? No.
But what I am saying is that investors overreacted to SARS and they are almost certainly overreacting to Coronavirus.
I was investing in 2003.
At the time, people panicked about airline stocks. About tourism businesses. It was, apparently, going to herald a new age of telecommuting and the end of face-to-face meetings.
Far from being like scientists, most market participants act more like early teenagers. “Oh, look… a shiny thing!” they all yell in unison, rushing to the shop front.
Then, shortly thereafter, someone else yells “There’s a new shiny thing over here!” and the herd bolts to the new fad.
But investors aren’t naive teenagers. They’re supposed to be highly trained, experienced and very well paid practitioners, who know how to respond to these things.
I’ll wait for you to stop laughing.
And it wasn’t just 2003.
From that same article:
“More recently, the Middle East Respiratory Syndrome (MERS) coronavirus spooked investors starting in late 2012. From Nov. 1, 2012 to Dec. 1, 2012, the S&P 500 dropped 0.8% while the price of gold increased 0.5%. This time, the S&P 500 bounced back from the scare much more quickly, gaining 15.1% over the next six months.”
Is it any wonder economics is known derisively as ‘the dismal science’?
To be fair to economists, though, they’re not the ones who continually screw this up, time after time.
No, it’s the investors. Running around, making Chicken Little look like a calm, sober judge.
Now, there’ll be some of you (I won’t identify you, I promise) who are already thinking “Yeah, but this time might be different”.
And I’ll give you that. I am no more possessed by perfect foresight than anyone else.
But it might have been different in 2003.
It might have been different after the GFC.
Or the dot.com crash.
It might have been different after Brexit.
It might have been different after Trump.
Or December 2018, when stocks fell meaningfully just before Christmas.
Or in January 2016 when RBS said ‘Sell Everything’.
You know the worst part?
A lot of people got paid a lot of money to sound sensible and explain why it could have been different that time.
A lot of people got paid a lot of money to ‘adjust investment strategies’ to ‘reflect the modern risks and broader macro environment’.
A lot of people got paid a lot of money, despite them not suitably advising their clients to keep their heads down and hang on.
Frankly, the money being paid, and the terrible advice being given, was probably more costly to many people, than the worst excesses of the banking Royal Commission.
And yet, here we are again.
US markets were down 1.4% at the time of writing (about 7.15am AEDT).
The usual talking heads are competing for attention, telling you how bad things can get.
I can’t tell you how mad it makes me.
There will be people lining up, this morning, to sell once the market opens, influenced (and, in all likelihood, scared) by the headlines and the talking heads.
‘At least I did something’ they’ll tell themselves.
Not like those suckers who held on while their portfolios fell, and…
As I said, I possess no stunning foresight. I can’t tell you what happens next, in either the short term or the long term. I’d be lying to you if I said I did.
But there has been no time in history — ever — when developed world stock markets have failed to scale their previous highs and go on to set new ones.
There has been no time when adding money to the market, regularly, has been a bad idea (indeed, continuing to add during the depths of the GFC was a stunningly profitable exercise).
I don’t know how the ASX will close today.
I don’t know if tomorrow will be better, or worse.
For all I know shares could be 5% lower — or higher — in a month’s time.
What I do know is that history is, very strongly — on the side of the patient, long-term, dollar-cost-averaging investor.
So sure. By all means react to the daily headlines. Sell. Buy. Buy. Sell. Try to be smarter than the other guy.
Just remember how that’s turned out… literally every other time.
Me? I’m not selling a single share. I might even be buying.
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