“Unprecedented” investing
Suffice to say, we are living in the midst of an unprecedented global event. The word is getting thrown around a lot these days. And it seems to be fairly appropriate. I gave my thoughts on this pandemic in an earlier post, and as things continue to evolve it appears clear we will see many historic decisions made in this country and countries around the world to help stop the spread.
Many of those decisions will hurt economic growth in the name of slowing the spread of the virus. That fact, coupled with the general panic that accompanies a worldwide health scare, has led equity markets to their most precipitous drop since 1987. There is a lot of fear out there, and understandably so.
With that framework in mind, I’d like to share a 2016 writing from famed investor Nick Murray:
“It may be useful, as we inquire into the pathology of panic, to examine what people are thinking when they arrive at the decision to sell portfolios of quality companies that may already be down twenty or thirty percent—and even more.
It doesn’t seem probable that they’ve concluded that iconic businesses like Disney, Apple, Berkshire Hathaway, JP Morgan Chase, etc, have lost that percentage of their enduring value as going concerns in just a few months.
And in fact, people have not concluded that, because they’re no longer thinking about anything as mundane as the enterprise value of companies. If they were, they wouldn’t be panicked.
Most often, they’ve fixed their attention on some national or even global “crisis.” The “crisis” may be real or imagined [Jacob’s note: I believe this one is real], and some turn out to be no crisis at all, but reality is never essential to a full-blown market panic.
Genuine panic, of the kind capable of taking the equity market down by a third, almost always requires two conditions be met. First, we have to be experiencing a national and preferably global financial/economic trend/event which no one can understand. For example, 2008: the entire global credit function seizing up, somehow because of the mass implosion of the subprime mortgages on American single family homes. Second, the masses have to conclude that the crisis is insoluble—that nothing can stop it from incinerating the economy. (In the aforementioned cessation of the global credit function, one had to believe that all the printing presses in all the central banks in all the world could not flood the banking system with enough liquidity to stem the credit crisis.)
There is, I suppose, a resultant third condition for a market panic worthy of the name. It has to enable the great mass of investors to say—because in their madness they fervently believe: This time its different.”
– Nick Murray, “Around the Year with Nick Murray”
We are experiencing a global crisis that no one can understand. Some people are saying nothing can stop it from incinerating the economy. Therefore we have checked both of Murray's boxes for establishing a full-blown market panic.
My encouragement to you is this: The Great Depression, the 1987 crash, the Internet Bubble, the Financial Crisis, 9/11… all of these bear-market events were unprecedented at the time of their occurrence. Yet, the average amount of time over the past ~100 years from bull market peak (the “top”) to bear market trough (the “bottom”) and back to the same peak, assuming reinvestment of dividends, has been about forty months. If your money invested in equities doesn’t have at least a forty-month time horizon, you would be wise to re-evaluate your asset allocation. If your money invested in equities does have a 5, 10, 20, 30 year time horizon, right now the only way you can realize a loss on those investments… is to "panic sell."
This pain most likely won’t end quickly, but it’s important to know that no one has a perfect crystal ball on this thing. What we do have is history, and history tells us that during each “unprecedented” crisis of the past, the investor who is rewarded over time is he who goes against the crowd in times of panic.