7 October 2022

The Allure of Certainty

The Allure of Certainty

Four months after world markets made new lows, investors can be forgiven for hoping that the stock market would have recovered by now and consigned the January to June bear market to history’s pages.

Instead, as central banks continue to fight elevated inflation with interest rate increases, we find markets extending the June lows into fresh declines.

While we know these declines will be temporary in the long run, the uncertain nature of the market’s random walk affects the investor’s emotional state. If you find your commitment to the principles of discipline and patience being tested, we can certainly relate. However, we know from history that the correct way forward is likely not out but through.

The Costs Outweigh The Benefits

Every bear market is different; some are short and sharp (think March 2020), while others take a while to play out (2007-2009). Unfortunately, it’s only with hindsight that the story can be summarised.

Given the uncertain nature of these adverse times, you could be forgiven for wanting to grasp at any hope of certainty, however false its promise may be.

One way that certainty tries to present itself is in the form of investment portfolio changes. With no way to impact the general market, it becomes tempting to take control over the element of the market we can control, our own portfolios. Presented with an opportunity to swap a volatile global equity portfolio for a stable cash portfolio, we perceive an opportunity to escape from the turmoil.

While there may be scenarios in which liquidating assets makes sense to your unique circumstances, it will never be the answer for capital you only require in the long term. Any attempt to outfox the vagaries of the market is nothing but speculation, a bet that’s more likely to end in regret than profit. Unfortunately, nobody rings a bell at the bottom of the market.

Additionally, any emotional relief the investor gets from fleeing to cash will only be temporary. Having escaped the immediate impact of a volatile market, the speculator will need to remain vigilant about timing their re-entry point, leading to a new set of anxieties.

The benefits of trying to time the market have been wildly oversold, and in our view, it’s undoubtedly a case of “buyer beware”. The potential costs far exceed the benefits.

Stay The Course

The immediate future remains uncertain, with more questions than answers. Central banks have a mandate to create long-term stability by dishing out short-term pain if that’s what they believe is required. This is a process for which there is no shortcut.

The exact path out of the current turmoil is unknown to every market participant, but given that we have our eyes on the long term, we have certain advantages. While, in the short run, the market will continue to be governed by the sentiment and emotions of billions of participants, in the long run, it will assess the true nature of the economy and the profit-seeking business that forms part of it.

We continue to remain confident that, as a group, these businesses will reward patient holders of their shares. As Benjamin Graham put it: “In the short run, the market is a voting machine but in the long run it is a weighing machine.”

We know that our message of practising discipline is not new, and we know that the emotional rollercoaster of experiencing market declines is more difficult for some than others. We also know that giving blanket advice is not easy so (as always) we are available should you want to discuss your unique circumstances.

Allow yourself to be scared, but please don’t jump off this rollercoaster mid-ride. The only sure way we know to capture the full returns of the equity market is to remain invested.