Investment View - March/April 2022
Intelligent Pensions - Introduction
2022 is shaping up to be an exceptional year. Markets are facing several challenges from rising interest rates and inflation, geo-political tensions, and a rotation in market style from growth to value stocks. It will take time to gain clarity on these challenges and we would expect periods of volatility to continue over the coming months.
For the March/April edition of our Investment View we reached out to Baillie Gifford for an asset manager perspective on the current investment climate. The remainder of the article has been written for us by Baillie Gifford and represents their views.
The article below is intended to be a topical commentary and should not be construed as financial advice. Past performance is not an indicator of future returns. Any news and/or views expressed within this document are intended as general information only and should not be viewed as a form of personal recommendation.
Baillie Gifford - Long-Term Investing Isn’t Easy
A reporter once asked Mike Tyson if he worried about Evander Holyfield and his fight plan ahead of a world title bout. He famously replied, “Everyone has a plan until they get punched in the face”. The same can be said for long-term investing in many ways. Everyone is a long-term investor until they figuratively get punched in the face. Like a boxer, investing is all about what you do next. You can get out the ring, irrationally react, or you can revisit your initial objectives and if nothing has structurally changed, you can carry on as you were.
To be clear from the outset, we believe sincerely in long-term investing and that requires us to ignore the market’s demand for attention on a daily basis. In our view, good company fundamentals (trustworthy management teams who can execute, a compelling competitive advantage, and a large market opportunity) do drive share prices over this timescale. Over shorter periods of time on the other hand, there are less predictable forces that affect share prices such as emotion (good and bad), fear of loss, and gambling on outcomes.
If I were to ask an exceptionally broad question of what a stranger is likely to do tomorrow and would you put your hard-earned money on it, you would think I am crazy. How could you possibly know given all the unpredictable outcomes. And yet, many market participants are trying to do exactly that every day.
Thinking back to the final days of the Trump vs Clinton presidential campaigns in 2016 as a case and point. There was a belief in the market that Mr Trump coming into power would effectively bring an end to corporate America and markets would fall. How are you shaping your portfolio (completely ignoring everything else that was going on at the time)? A question regularly asked of us back in those days but not one we would arrogantly pretend to have an answer to. If we were to dissect this question, there is not one, but three, questions being asked. 1. Can you correctly identify who is going to win the election? 2. How will the market react to the outcome? 3. What are you buying and selling as a result?
If you were trying to time the market and ‘shape’ your portfolio to make money or try and avoid losing it, you either correctly identified Trump getting into power but lost money as you reduced risk, or, you incorrectly guessed Hilary Clinton would win, and subsequently made money on the market going up. Either way, you were wrong. As 2017 came to a close, the end of President Trump’s first year in the White House, the Dow had surged more than 1400 points since the election result. All told, the US market had gained $1.4 trillion in value over that period. I believe this is a good example of the perils of trying to second guess the market by taking short-term ‘bets’ to navigate volatility or to avoid losses.
In truth, I am not for a second saying being a long-term investor is easy. Being patient is difficult. Being out of line with everyone who is frantically doing something is uncomfortable. As humans, we have never had as much access to information as we do today and our underlying need is to do something with it. Through advancements in technology and our increasing need for instant gratification, we now receive our Amazon parcels same-day delivery, and one can order a coffee on an app before arriving at the café to avoid a 2-minute queue. Our lack of patience has had a huge impact on the world of investment. A study by Amos Tversky and Daniel Kahneman identifies that losses are at least twice as powerfully felt than an equivalent gain. Couple this theory with our access to information and the day-to-day rise and falls of ‘the market’ become understandable, but not predictable.
Using 2020 and 2021 as a more recent example, the market has focused heavily on COVID, working from home, inflation and interest rates, regulation of the big technology companies, China’s aggressive reaction to their own census, and a possible war between Russia and Ukraine and its subsequent effect on energy prices. Markets (growth funds) aggressively rose in 2020 as risk was on, and then subsequently fell back in 2021 as perceived safe companies had their year. In reality there was no structural change that would make us believe either market condition was long term. Like many other periods in the past, there was a lot going on at one time and the market is emotionally acting, and reacting, to it all.
If you are able to look beyond the market’s incessive need to react to every piece of news, the outlook, in our mind, remains extremely positive and intact. Disruptive forces for change, driven by technology, in the fields of healthcare, the electrification of transport, and the energy transition to renewables, are exciting trends that will play out over decades rather than months. The scale of the disruption that we are seeing is more akin to the industrial revolution, and to many market participants it is simply too large and too far away to comprehend. The advantage to a long-term investor is the ability to focus efforts on understanding how these trends will play out, and who will be the potential winners and losers. Progress is rarely linear, but by refusing to succumb to the markets short-term whims, side-stepping needless trading, and by sticking to your beliefs, the opportunities available to long-term investors remain.
The value of an investment, and any income from it, can fall as well as rise and investors may not get back the amount invested. This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned. Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA)