Three legal investment strategies
I didn’t want to write about the markets this week, but the S&P 500 is now just negative for the year and down 10% since the high in September so I have resigned myself to the fact that I need to say ‘something’. Except after a number of hours at my computer I have not produced anything eloquent.
Twenty-four hours later I realise it is because there is not that much to say. The markets have pulled back after some hefty gains. For any long-term, globally diversified, goal-focused investor, it’s like a speed-bump in the road; irritatingly common, something you wish you could go around, but ultimately something you know is there to keep you safe.
I have thought about abandoning this piece and not writing about the market – I have a few interesting ‘non-market’ topics that I have wanted to cover, but I keep coming back to it. It feels like a vortex sucking me in!
What we need is perspective. We don’t get that from the media. Today they are busy igniting the fire with words like ‘bloodbath’, ‘carnage’, ‘massacre’. That is just what they do. As humans, our brains are wired for survival so words like this really make us want to run.
I want to stress here just how normal the current market movements are and how crucial it is to stay invested through periods like this. I know I say it over and over again, but it’s so easily forgotten in the moment when your instinct is telling you ‘I’ve got to get out before I lose any more’. Acting on your instinct is never a good idea in investing because it is not a strategy, it’s an impulse. You’ve got to have a strategy.
But let’s play a little game here and say that you do get out (obviously you are not my client!) and you tell yourself it is a strategy. What happens next? Well, one of two things happen – the market goes up from here (you’re ‘wrong’) or the market goes down from here (you’re ‘right’). And unless you plan to stay out of the market forever (please tell me that’s not your plan) then your strategy has to include getting back in again.
So, here are two questions recently asked by Nick Murray: 1) Where do you get back in if you’re ‘right’ and the market does go lower, and 2) When do you conclude that you were ‘wrong’ and get back in if the market goes higher?
Are you starting to see the difficulty here?
Remember if you are ‘right’, you will only be temporarily right (assuming what you own is a globally diversified portfolio of great companies) because the market goes down but it never stays down. So you have to be very opportunistic about when you get back in. My guess is that you will miss the opportunity because if you were panicked into selling in the first place then the chances of you having the emotional fortitude to buy back in lower down is slim. Your mindset will always be ‘but it could go even lower’ and that will prevent you pulling the trigger until it’s too late and you realise that the market has recovered and is now higher than it was when you got out (this happens very fast). You go from being ‘right’ to being ‘wrong’ pretty darn quick.
So either you are ‘right’ then ‘wrong’ or you are flat out ‘wrong’.
There is one other possibility. You are lucky. You actually get out at the right time and manage to get back in at the right time. This is probably the most dangerous scenario because you now think you are a genius market timer. You almost certainly don’t say to yourself ‘wow, I got really lucky there and I don’t think I’ll do that again in a hurry’. What you do say is ‘huh, this is pretty easy, I think I’ll try this again.’
And poof, there goes a lifetime of returns.
Morgan Housel (one of my favourite investment writers) recently tweeted:
I have a first-class degree from Oxford University which I suppose on paper puts me in the top something percent in terms of ‘smartness’. However, the more I learn about the markets, investing, human psychology, money, life, the more I realise that this industry is full of some of the smartest brains in the world and who would I be to say that I am smarter than them? Being smarter than others is an almost impossibly hard strategy to employ. There is no way I could build a business based on being luckier than others. So we are left with being more patient (and with that I would also add more disciplined).
Now that’s something we can run with! We can do that! We can be that!
We are patient, we are disciplined, we have built strong financial foundations beneath us, we have prepared for this, we can get through it unscathed.
I love this quote, which is sometimes attributed to J. P. Morgan:
We are the rightful owners. We will always be the rightful owners.
And if by any chance you are not yet a rightful owner, I would love to help you be one. To me, it seems like a great time to become one.