Over the past seven weeks, our lives have become more uncertain than in most of our living memories. We have been bombarded with news flow and data points which, largely, do little more than increase the uncertainty that we are all experiencing.
In our day-to-day lives, now, for the first time, we face questions of when the epidemic will subside, when can we go back to our workplaces, when our children will be able to go back to school and what the future holds in terms of job security and economic impact.
Despite the dearth of opinions from experts, ranging from politicians and epidemiologists to economists and market participants, the answers to these questions are inherently unknowable. As investors it serves us well to remember that much of what we see and read in the news amount to nothing more than estimates and conjecture. We simply do not know when the epidemic will be manageable, what the economic future looks like or where financial markets will head in the immediate future.
In times of extreme uncertainty such as these, a disciplined investor needs to identify and weigh up what is known and what is unknowable. The future path of the epidemic and markets are unknowable. Whether we have seen the bottom in equity markets can only be known after the fact. So, what do we know? At the risk of over-simplification, we know three things:
- The epidemic will subside and become manageable at some point.
- Many financial assets, particularly equities, are at a lower price than they were before the global spread of Covid-19.
- Markets recover their value over time.
This brings us to the questions commonly asked during times of market stress; should I sell or is now the time to buy? The answers to these questions are nuanced and need to be balanced against your own personal appetite for risk and currently invested portfolio. Let’s look at these in turn:
Should I sell? – if you are a long-term investor then financial academia states that the best thing to do is nothing. Selling now will likely crystallise losses thus destroying capital. It also leaves the question of when to buy back into the markets. To reiterate, we cannot know whether portfolio will rise or fall in value in the immediate future. However, we do know that typically, investors are rewarded for weathering the storm and staying invested.
Is now the time to buy? – to quote the respected investor and founder of Oaktree Capital Management Howard Marks, “now is a time to buy”. What’s the difference you may be asking? The time to buy is a definitive statement which implies knowing that we have seen the bottom in equity markets. This is unknowable and calling the bottom in markets is a fool’s game. However, we do know, with absolute certainty that many financial assets are priced less than they were seven weeks ago. Therefore, we can say with confidence that now is a time to buy.
Some professionals in the financial industry have a habit of over-complicating matters. We advocate the following:
- Keep it simple
- Act on what you know, not opinions from experts
- Stick to the long-term plan
For portfolios that we manage, this means not being tempted to tinker with asset allocations or constituents. Our processes have served our clients well over the past five years and we expect them to continue to do so in the longer-term, no matter how uncertain the current environment may be.
Until next time, I hope all your families and friends stay safe and well.
Steven Lloyd, Investment Director