THE EID READ - Through the Looking Glass.

Accelerating the journey from an inexperienced investor to an experienced investor.

 
Asset manager “herd” –overweight OR underweight.

Through the Looking Glass

Accelerating the journey from an inexperienced investor to an experienced investor.


1. The problem for inexperienced investors.

  • The US economy is on the edge of a recession- say the pessimists. US markets YTD are down, say the facts.

  • The role of the locus coeruleus (LC) – will set off the fight or flight buttons.

  • Gut instinct: a hinderance to inexperienced investors.

2. The solution- “experience”.

  • Knowledge, it combats stress.

  • Knowledge- four gems of wisdom.

3. Summary: What do experienced investors know?

  • Current woes present the opportunity for inexperienced investors to graduate.

1. The problem for inexperienced investors.

The word “recession” is beginning to creep into asset manager speak as I write with:

  • The US economy, GDP, down minus 1.46% (annualised) for Q1.

  • The S&P500 down minus 4.95% YTD (after a positive March).

  • The Nasdaq is in its worst form for 14 years.

Recession is defined as two quarters of falling GDP. The pessimists are preparing a field day.

Sitting on a beach in far-flung Dubai, away from the rigors of the US economy, this might not seem to matter. It does, with employers turning to off-balance sheet Workplace Savings Schemes (noting the Dubai governments recent announcement for expatriate workers)- we should note that the go-to “risk asset” for growth in US Dollar terms (against which Gulf currencies are firmly pegged) is the US equity market. US markets currently represent 54.5% of world equity (risk) markets by capitalization. Down from 2020 numbers when it was over 60%. The point here: USD thinking investors can’t ignore the US. It is the engine which drives most USD Pensions, Workplace Savings, and mediem to long term personal savings plans.

The problem? Intuitively- when markets fall it makes sense to sell and buy back when markets go up. This is the thinking of the inexperienced investor. He/she has an excuse- markets don’t like uncertainty and nor do inexperienced investors- stress levels rise. Apparently, uncertainty is more stressful than knowing something bad will happen. Research at Wharton Business School tells us that the LC (locus coeruleus) sets off the hypothalamus-pituitary-adrenal (HPA) releasing cortisol which deals with stress. Wharton say that the process leads us to making quick decisions- gut instinct stuff. This is what happens if we do not know what we are doing!

The problem and Generation X: They had COVID and an associated market reaction to deal with. But the last recession was in 2007-2009. Many of that generation haven’t experienced a recession. Diagram 1 shows the US Equity market on a colossal 13-year Bull Market. If you were starting savings in say 2009 aged (say) 24- you are now around 37 years of age – with maybe 1.5 children. Our advice today firstly: fight the gut reaction, stay calm stay invested whether the R-word comes along or not.

Secondly, listen to the experts, - we start with Warren Buffet on market corrections: “ A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices’.

The 2009 to 2022 Bull Market (Bloomberg).

2. The solution- “experience”.

Academics tell us that there are two ways of learning: from study, the bookworm method, and also from experience in the field. Current conditions are ripe for the latter. In the Mondial definition an “experienced” investor has been investing for over 4 years as one of three pillars of distinguishing “inexperienced” from “experienced”. Sophisticated and professional investors assumed to be less troubled by the R-word. Our Generation X types will have experienced volatility- but not recession. How will the inexperienced investor handle a prolonged bear market?

Our Through the Looking Glass piece is targeting advice to inexperienced investors to hold faith in the fact that markets will always “revert to mean” and inflate back up. 2022 may well provide the experience required of sitting tight on negative market sentiment. Look through the short-term news and trust that War will not be forever, recession is followed by recovery and that sitting tight is sitting right.

Four gems of wisdom help us with dealing with the white-knuckle ride of war, uncertainty, and the pessimistic bears.

2.A- The Guinness Glass- prices are not what they seem.

The Guinness Glass.

Our Guinness Glass is not for drinking but study. An equity/stock price goes down when there are more sellers than buyers. Does that mean that everyone is selling?

At the time of writing, Amazon stock has suffered its worst day of trading for 15 years- apparently USD 200 billion of value. Down 13% on the year. Where did USD 200 billion go? One way to view the fall is that the white part of our Guinness Glass represents the trading- the sellers out-numbering the buyers. The “black stuff” in the Guinness Glass represents those who are not selling. The sitting tight institutions- Pensions, Workplace Savings etc. They will remain with their Looking Glass – sitting tight- unless …….you and I stop using Amazon.

Nicholas Taleb has a phrase- “antifragile”- that might be used for companies like J&J, Proctor and Gamble. Their balance sheets and the demand for their product remains so strong that falling prices should really be ignored. Short term prices are not an important aspect of the company’s medium-term pathway. The antifragile companies have a lot of the black stuff in them.

2 B- The negative impact of gut-feel inexperience.

The COVID impact on markets in the highly memorable chaos of February/March 2022 was an instructive piece of on-field learning. Recall those days: uncertainty colossal- being in a lockdown against a bug- unprecedented. In Diagram 3- “Average Investment value destroyed per switch in 2020”. The Diagram is an extract from the South African Momentum platform printed in an excellent paper: “COVID-19 Investor Behaviour”. It shows the reaction of retail investors in blind panic as a result of the March concerns. One year on from this date the S&P500 had posted a 100% recovery. The Diagram shows that those who sold and bought back after the recovery lost an average of 19.44%.


Momentum Wealth. Average Investment Value destroyed per switch in 2020.

2.C- Ignore the white noise.

Advice from friends who sound convincing is hard to fight. The advice to ignore them needs the help of experienced in-the-field practitioners. We lean on Peter Lynch- formerly of Fidelity’s flagship fund- but his excellent book “Beating the Street” is one that really helped many understand the difference between Wall Street gizmo predictions (for that read any white noise) and what markets are about.

To Lynch: “Thousands of expert’s study overbought indicators, head and shoulder patterns, put-call ratios, the Feds policy on money supply…and they can’t predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack”.

Another angle of don’t follow the crowd comes from Warren Buffet “ The most important quality for an investor is temperament, not intellect. You need a temperament that neither drives great pleasure from being with the crowd or against the crowd”.

2.D- Invest for the long haul. Traders - do they actually make money?

I am a long termer. I’m not a seller”- Prince Alwaleed Bin Talal.

With some disappointment we bet on the Aesop’s Tortoise rather than the Hare. Life would be much easier if money could be made quickly and easily. It doesn’t happen. Increasingly as trading platforms open ubiquitously, with the UAE one of the leaders in regulating Crypto and other new flavours of investing, we find ourselves lacking in evidence of get-rich-quickly portfolios working .

On this we jump on a quote from Jack Boyle on his experience with traders which matches my 40 years: “ The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I dont even know anybody who knows anybody who has”.

SUMMARY- WHAT DO EXPERIENCED INVESTORS KNOW?

SUMMARY- WHAT DO EXPERIENCED INVESTORS KNOW?

What experienced investors know is not a secret. Access to the knowledge is straight forward. Not complex. However, believing it- seems to be drummed in best by experience. Potentially the year 2022 provides inexperienced investors with exactly that opportunity of experience.

Nuggets of insight acquired from experience are listed everywhere but for an easy read- review: https://www.davisetfs.com/investor_education/quotes

The site lists the following traits of successful investing- the traits of the experienced investor:

1. Be patient and think long term.

2. Disregard short term focus

3. Don’t try and time the market

5. Markets fluctuate. Stay the course.

6. Market corrections are an opportunity.

END.

Benjamin Graham

Invest for the long haul. Don't get too greedy and don't get too scared.” “The best way to measure your investing success is not by whether you're beating the market but by whether you've put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

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