“The trend is your friend”….. The elephant in the room: what trend?
Firstly, leave the elephant aside. The phrase “the trend is your friend” is a common refrain from stockbrokers who buy equities in rising markets and sell in the falling market based on the concept that the direction of travel of an equity has much to do with a likely future value. Back to the elephant. As markets rocketed downwards (March) then upwards (also March) then up and down again for April and May- some readers might ask: where is the friend in this clearly trendless world of volatility? For this weeks “Academy” piece we lean limply on the work of Stephen Hawkins and his book “A Brief History Of Time”, in which at one point he seems to suggest that if you step so far back from the present then any point in time is relative to other points in time. Time is a continuum. With apologies to scientists who more fully understand the Hawkins book, the fact is that our current volatility is only a set of dots in a longer story. To make the point – I attach two “historical” graphs-:
1. Blackrock- dated 2011- in which the point about equities being a “long term” philosophy is made. The graph tells the tale of long term volatility but in an overall upward direction. In short, the points made in the text in 2011 (after a period of volatility) remain the same in 2020 as in 2011. The current volatility is a matter of concern only if the need for cash is imminent. 2. ENBD slide dated 2013 (source Bloomberg) of a buy and sell strategy (moving on every 5% move up or down) against a “stay calm, stay invested” strategy. Again patience wins.
The point, of course, is that whilst we face the most awkward of times with uncertainty and fear lurking on every corner it is easy to get stuck in the moment. The current moment is one of excessive gyration- and getting stuck in it creates a myopic view. We print the “historical” graphs to remind investors that time provides wisdom. That the long term friend is the upwardly inflating trend. As long as economies have the capacity to inflate back upward –then why would our current set of volatile dots impair the longer upward friend and trend?