February 8, 2020

Plant the seed and watch it grow…

“In the short run, the market is a voting machine, but in the long run it is a weighing machine.” – Benjamin Graham

When investing in stocks, time and patience work strongly in our favour! The day you plant the seed is not the day you eat the fruit. Be patient. Longer time horizons allow fundamentals to develop and pass through to investors via stock returns. In the short run, markets can fluctuate wildly, responding to swings in human sentiment and changing economic cycles. But over time they revert to the mean, reflecting the growth of corporate earnings, technological progress and the real economy.

 S&P 500 returns 1927-2018
Holding PeriodPositiveBetter than cashBetter than bonds
1 year73%67%65%
2 years82%73%74%
5 years87%76%75%
10 years94%84%82%
15 years99%94%87%
20 years100%100%99%

Source: A. Damodaran, Bloomberg. Returns with income reinvested.

“The secret of making money in stocks is not to get scared out of them.”  – Peter Lynch

The lure of quick profits and the fear of loss can both be strong, tempting investors to speculate in “timing the market” i.e. attempt to buy low and sell high. Unfortunately for most, the end result is far worse than simply buying and patiently holding their stocks. People are often too emotional about the decisions they make: when markets dive, they tend to panic and sell; when shares have had a good spell, many investors go on a buying spree. Ultimately, this collective behaviour is what causes markets to fluctuate so much over shorter time frames. Rather than partake in such a myopic approach, an investor is better off sitting tight and collecting dividends as new technologies and human creativity propel long term economic growth.

Source: A. Damodaran, Bloomberg. Returns with income reinvested

“Never bet on the end of the world, it only happens once.” – Art Cashin

It’s understandable to be concerned and even pessimistic about future prospects. 18th century economist Thomas Malthus famously predicted that human population growth would outstrip food production, and thereby drive living standards back to subsistence. He perhaps underestimated the human drive for exploration, discovery, and innovation. He probably assumed assumed a static amount of resources based on his time.

As investment advisors, we don’t have a crystal ball at our disposal; we do however have an understanding of how market returns work and what previous cycles can teach us. Research shows that those who stay invested over the long run in a well-diversified portfolio will generally do better than those attempting to profit from turning points in the market. By allocating a reasonable proportion of assets to stocks, an investor can ultimately withstand the ups and downs of collective sentiment and economic cycles, and benefit from human resourcefulness, entrepreneurship and the commensurate long term appreciation of stocks.

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