Portfolio manager believes true investment conviction is found during moments of hardship, not when things look rosy
Gene Kim is a portfolio manager and branch owner at Summit Private Wealth, Mandeville Private Client. With the market downturn and coronavirus outbreak rocking investors, Kim provided WP with his take on these unprecedented times.
Like a familiar twist from an old scene or a novel script of a new screenplay, how do we rationalize the story that’s unfolding right before our eyes?
Are we cognitively biased from our own experiences? Does our personal situation impact how we perceive this event-driven pandemic? And more importantly, is the world going to end?
Not to minimize the seriousness of COVID-19 and the parallel oil shock, but as Mark Twain said it best, “history may not repeat, but it sure does rhyme.”
Although none of us really remember the last time the markets fell so precipitously and the extreme measures now being taken in a global effort to stem this pandemic, we have seen the story of various exogenous events impacting the glorious narrative.
The common thread is humanity and our primal inclination to make decisions based on fight or flight when faced with adversity. The problem is that those basic instincts don’t always serve us well when it comes to making rational investment decisions.
Whether it be due to loss aversion or confirmation bias, we know that a different toolkit is required to succeed at long-term investing. When the markets are strong and hence more confident, it’s easy for skeptics to criticize someone like Warren Buffett for being dated in his approach, only to realize the emperor has no clothes when the going gets tough.
Einstein said that the definition of insanity is repeating the same actions expecting different results. Well that’s the pattern the stock market reveals every time a crisis materializes. Maybe the problem isn’t the stock market.
Perhaps we’d be better served, as Benjamin Graham says, to view the market as a market of stocks with actual businesses we can proudly own rather than fall victim to the allegory of Mr. Market. Only then would we realize that short-term fluctuations have no bearing on our long-term objectives and that although it’s impossible to time the market consistently, we can look at pricing as an indicator of attractive entry points so that we can create that margin of safety.
The irony is that for most people, buying cheap businesses during fragile markets is not an easy task even though it may be a quality business. Not only is it emotionally hard to do, it’s perceived effectiveness is diminished because the strategy is so deceptively simple.
For those of you who don’t know how the story ends, here’s the spoiler alert. What we are seeing now is not a tech crash or a systemic issue with the financial system, it’s not 2000 and 2008 all over again, and like with all bear markets and potential recessions of the past, this too shall pass.
Most of us know that true conviction is found during moments of struggle and hardship, not when things look rosy and optimistic. If you’ve read past the spoiler alert and you already have a sound philosophy, maintaining your investment discipline will put the odds of succeeding in your favour. It may be the boring approach, but the alternative is facing Mr. Market and trying to reinvent the wheel.