What caught my eye this week.
A year or so has passed since global stock markets began to recover, resuming their age-old tradition of making smart people look like idiots.
- Tech stocks rallied first, which was blamed on 20-something traders and lockdown mania.
- Later in the year, small cap stocks joined the party. Just more retail madness, we were assured.
- Finally, cyclical and value stocks and the share prices of companies smashed-up by the pandemic began to soar. The Fed had euthanized the market, screamed the talking heads.
Well, not so much.
What really happened was tech stocks rallied as it became clear that economic life would go on, mediated by the Internet.
As the extent of government support was revealed, riskier companies that had been hit hardest in the crash began to bounce back.
Lastly, confirmation of the (always-predictable) vaccine success suggested a boom was around the corner.
All this was aided and abetted by lower for longer interest rates, no doubt.
You hate to see it
All this is clear enough in retrospect. It wasn’t at the time.
Nevertheless, the level of nonsense going around last March was off-the-scale.
Some savvy bloggers I like earnestly discussed how start-ups were dead for a generation.
When Robin Hood suffered a couple of outages (due to the sheer volume of trades it was handling) others bizarrely concluded the platform was done.
We weren’t in a recession, apparently. It was a once-in-a-generation depression.
People might never fly again! It had been revealed as forever unsafe. Would you ever go into a cinema again? Not even if vaccinated.
Oh, FIRE1 was finished – how often did we hear that one?
Most perplexing of all: how could the stock market go up when people were losing their jobs, and everyone was shopping on Amazon?
I got a lot wrong in 2020. Suffice to say I haven’t missed my calling as an epidemiologist. It was a truly strange situation, even if it wasn’t your first rodeo.
Still, I’m glad I kept my head where investing was concerned.
As I wrote around the bottom on 22 March 2020:
There’s too much panic and gloom out there. This is very bad, but it’s not the end of the world. It’s not even the end of the equity market […]
I have been increasing equities and risk all last week. Nobody knows. But there’s a lot in the price already.
I say this 100% partly to blow my own trumpet. (I’m fed up of US bloggers writing “nobody thought it was good time to buy in March 2020”).
But more as a reminder that it really is possible not to run with the herd.
You have to assess what has changed and what has not.
I was pleased to notice one person listening in amid the market scrum:
Look forward, not down
You should always try to remember two things in times like early 2020.
Firstly, the market in the short-term reflects people’s emotions and best guesses. It does not reflect reality, as such.
When everyone is scared and their guesses are made in the dark, expect that to show up in prices.
Secondly, in the longer-term the market is a discounting mechanism. This means it looks forward.
Every time people met rising share price last year with incredulity, it was because they were comparing where the market said we were going with what they were seeing in the day’s news.
That’s the same as getting hysterical on a flight over the middle of the Atlantic because you’d bought a ticket to New York, but all you see out of the window is the ocean.
Things can only get better
Everyone is happier now, of course. Things are looking brighter by the day.
From the Financial Times:
“It’s remarkable how quickly the consensus has shifted in only six months,” said Neil Shearing, chief economist of Capital Economics, a consultancy.
It is now becoming clear that the pessimism last autumn about the longer term outlook for advanced economies was an “intellectual failure”, he said, because most economists “reached back to the financial crisis and applied the lessons from that period, but this crisis is different”.
This change in mood is very evident to somebody like me who eats and drinks this stuff all day long.
Some of those previously panicking pundits now opine that the market “will never be allowed to crash again – the Fed won’t allow it.”
Even if it does, they believe index investors will always buy-in and so shares will always quickly bounce back.
These propositions may well have some truth to them. But it’s easy to see they’re made on the back of all-time highs. We’ll see how fast they hold the next time there’s a dip.
The truth is it’s often better to buy when investors are gloomy, rather than when they are whacked-out on happy juice.
I wrote in February 2020 – just before Covid properly hit us – that:
Every year the global bull market in equities and bonds continues, it gets harder to convince people that investing isn’t always so breezy.
Nobody paid me much mind, except to say they didn’t want to own government bonds.
A couple of months later some were writing obituaries for capitalism.
Now the global economic output is bouncing back and with it optimism about investing.
Yet as Sentiment Trader pointed out this week, buying when manufacturing has been in a slump has actually been the better guide to stronger market returns:
Human nature tells us that we should be happiest when this index is at a high level – thereby indicating that manufacturing and by extension, the economy is strong.
One might intuitively assume that this is when the stock market performs the best.
And one would be wrong. Very wrong as it turns out.
The full article has some persuasive charts and tables.
Charlie Bilello made a similar point on the back of the same strong growth figures. But he sensibly cautions against reading too much into this:
Does that mean manufacturing activity is unimportant to the economy?
No, just that using it to time your exposure to stocks does not appear to be an effective strategy.
The fact that the best performance from stocks has actually come after the worst manufacturing readings tells us as much.
And it provides another instructive reminder that the stock market is not the economy.
Any way you cut it, most stock markets look expensive right now. Even the junky stuff has rallied.
That is rational, but it isn’t a cue to go crazy.
Stay slow and steady and sleep at night
Indeed, rather than charging in and out of shares, it would be hard to think of a better 12-month advert for a passive investing strategy.
Or, in short, do not sell.
That’s because this stuff is hard. You can be battle-tested and alert to people panicking and still be too cautious (as even I was in March 2020) or sell your fast-growth stocks picked up in the slump after they’d doubled in a few months, only to watch them go on to double again. (Yep, I did that, too).
Investing only looks easy in hindsight. But it’s not quite so difficult as emotionally flighty pundits make it sound in the midst of the highs and lows.
p.s. We had several dozen substantive responses – far more than I expected – to our call for new writers. At least ten could be a good fit for Monevator. I need to set aside a day to consider everyone properly. Will be in touch soon!
No more years: I FIRE’d work – Monevator
What are Enterprise Investment Schemes? – Monevator
From the archive-ator: Risk/return: nothing ventured, nothing gained – Monevator
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!2
Port problems and stockpiling surge give British businesses higher container costs than Europe – ThisIsMoney
Women could be owed ‘lottery-winning’ pension sums – BBC
British Land deal a ‘vote of confidence’ in the London market – ThisIsMoney
Nest seeks lower private equity fees in return for regular pension cash flows [Search result] – FT
Cryptocurrency Ethereum hits new high after Visa agrees to allow crypto-payments on its network – ThisIsMoney
As 800 new pavement licenses are granted, is café culture set for a boost? – BBC
After a decade of pension reforms… [Research, PDF, slightly old] – ISF
Is it cheaper to own or rent a home? – Which
Products and services
Products to help first-time buyers onto the property ladder – Guardian
How to pay off ‘buy now, pay later’ bills – Which
Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade
Trolley price comparison finds Waitrose 32% more expensive than Lidl – ThisIsMoney
Grayscale Bitcoin Trust assailed by investor over discount – Yahoo Finance
When it comes to index funds, the devil is in the details – Morningstar
Homes for first-time buyers, in pictures – Guardian
Comment and opinion
Your pension, your risk, your choice [Search result] – FT
Taxes and happiness – Klement on Investing
Why you should bet on London [Search result] – FT
Risk less to make more – Humble Dollar
The growth-value cycle – A Wealth of Common Sense
Is it time to revisit ‘liquid alts’? – BPs and Pieces
Historic pandemics data provides warning for owners of capital [Search result] – FT
What kind of (would-be) retiree are you? – Humble Dollar
[I’m shocked – shocked – to learn that…] the NFT bubble has burst – The Irrelevant Investor
Larry Swedroe: the only right way to view an asset – TEBI
The long game – Indeedably
Another reason not to pick individual stocks – Of Dollars and Data
Naughty corner: Active antics
JP Morgan CEO Jamie Dimon’s letter to shareholders – JP Morgan
Why a passionate stock picker shouldn’t set up as a fund manager – Neckar
More accuracy – Robert Vinall
The changing nature of momentum – Validea
A Q1 investment trust portfolio review – IT Investor
Assets have tanked at two of the world’s biggest short sellers – Institutional Investor
‘A small, sanitised existence’: what effect will the pandemic have on today’s babies? – Guardian
Returning to the office sparks anxiety and dread for some – New York Times
New Zealand and Australia to restart quarantine-free travel bubble – NPR
How Covid-19 jumps from humans to animals, worrying scientists [Video] – WSJ
Kindle book bargains
Never Split the Difference by Chris Voss – £0.99 on Kindle
Rebel Ideas: The Power of Diverse Thinking by Matthew Syed – £0.99 on Kindle
Real Life Money by Clare Seal – £0.99 on Kindle
Blood, Sweat, and Pixels: The Turbulent, Triumphant Stories Behind How Video Games Are Made by Jason Schreier – £0.99 on Kindle
Buy a Kindle – they’re not just for whiling away the end times!
Sea-level rise is creating ghosts forests on an American coast – Guardian
Off our beat
The big lessons of the last year – Morgan Housel
How to be (time) rich [Podcast] – Rational Reminder
What scares Ken Dychtwald about getting old [Click the ‘X’ top-right to read] – Barrons
“A world equity index tracker is the only equity investment a rational investor ever needs to own.”
– Lars Kroijer, Investing Demystified
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- Financial Indepedence Retire Early [↩]
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