Since October last year, the All-Ordinaries Index has appreciated 15%, the Nasdaq is up a similar amount, whilst the Dow Jones and S&P 500 are up by approximately 10%. Last September there was “mayhem” in UK markets, bond yields were soaring, interest rates were rising, inflation was a headline news item, and most commentators predicted a recession. Many have read or heard about the field of human biases and heuristics, and recent behaviour has evidenced a classic form of recency bias, as it relates to the GFC:
…the tendency to overemphasize the importance of recent experiences or the latest information we possess when estimating future events. Recency bias often misleads us to believe that recent events can give us an indication of how the future will unfold.
The last time recency bias was this strong in financial markets was during the 1990’s in which every market downturn created a reference to October 1987. In fact, every October, many in the markets became very nervous due to the psychological scars of this prior event.
We don’t profess to know where the stock market will be one day or one year from now, but the essence of successful investing isn’t to predict markets. It is to purchase quality businesses, ideally when they are out of favour. John Templeton’s famous anecdote springs to mind:
“The main thing that people need to learn is that selecting assets is totally different from almost every other activity. If you go to 10 doctors and they tell you the same medicine that’s the thing to take. You go to 10 engineers to build a bridge they tell you the same thing that’s the way. But if you go to 10 investment advisors and they pick out the same asset, you better stay away from ‘em.
To say the same thing, in other words, the time when an asset is selling at its best bargain price is when most people are trying to sell. There’s no other reason why an asset will go down to a bargain price. And if you wait until it gets through the tunnel and out into the sunshine you’ll have to pay a premium price. If you even wait until you can see the light at the end of the tunnel, you already passed the best bargain days.”
There are always ‘walls-of-worry’ to climb, and some are higher than others, however, long-term patient investing is the hallmark of the great investors, and allows investors to sleep soundly at night.
During the recent downturn, several opportunities to purchase excellent businesses at fabulous prices emerged, particularly in international markets. Readers will recall our earlier article on Alphabet (i.e. Google) from the February newsletter edition. If you would like to discuss similar opportunities in more detail, please contact us.