Be Like Water
This week we discuss our thoughts on investing during ongoing volatility, give hope to a brighter future ahead, and discuss the speed of information.
Dear Clients and Friends of Farrer Wealth Advisors, we are pleased to bring you the Farrer Wealth newsletter, which includes our latest blog posts, fun facts, and general articles we find interesting. Happy reading and happy investing!
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I was recently reading an investor letter and it contained a line that struck me when the fund manager stated, “These are clearly the most difficult months since we launched the fund in 2010.” This letter, released shortly after Russia announced its invasion of Ukraine, expressed the frustration that most active managers have felt over the past several months. Just to give you a sense of how difficult it is to find somewhere to hide during these past several months, let’s look at the various investment options:
Chinese stocks: Government crackdown on tech companies and those that do not align with party/country interests
Tech stocks: Double whammy of slower growth post-covid and higher interest rates
Financials: Struggling with a slower than expected rate hike, and potential flat-to-negative GDP growth.
Emerging Markets: Cost pressures/rising rates due to inflation, much stronger USD
Recovery plays: Omicron, inflation, war (travel stocks).
European stocks: Russia invasion
Russian stocks: Putin help you
For those stating that this is predominantly a “growth stock” problem, this is verifiably false. All major growth, value, EM, and global indices are down for the year. Granted, growth/tech stocks have taken the biggest beating, but it’s about choosing how much money to lose rather than losing money at all. The only bright spot has been in the energy and commodities space which has allowed the S&P 500 to maintain at least some modicum of stability. However, ESG movements both from LPs and regulators have made it a difficult place to invest, perhaps to our detriment as investors and as consumers.
The market remains unhealthy with wild swings daily, extreme bearishness, an onslaught of negative news, and a non-zero chance of nuclear war. CNN’s Fear and Greed index has been fluctuating between “fear” and “extreme fear” for a while. With Russia’s aggression showing no signs of abating and inflation appearing just as stubborn, it appears that investors are in for a rough ride. Now, I’ve been thinking about how one invests in this environment, specifically from a mindset perspective rather than any particular investment focus and I’ve come to the following conclusions.
Be like Water: Bruce Lee once said “Empty your mind. Be formless, Be shapeless. Like water” By that he meant be flexible and adaptive, which is quite apt advice in this environment. I think it’s important to question all your assumptions and be nimble in your thinking. Morgan Housel once commented that most of the “star” managers he meets tend to be quite young, because every decade or so, what worked well seems to change. We’re entering a decade full of perils and opportunities. Perils in the sense that every year of the 2020s seems to bring another major global risk, and it feels we’re stepping back in time. So far, it seems like a decade of plagues, inflation, and war. But it could also be the decade of wonders, one where the metaverse comes alive, where we reach escape velocity, or where the individual contributor starts to matter more than the corporation. The future is hard to predict, but I do strongly think this decade will be quite different than the past one, and the best investments of the last decade are unlikely to be the best during this one. Thus, keep an open mind, explore new sectors and investment situations you hadn’t before. The one benefit of a market drawdown is that it unveils a plethora of opportunities, but if you continue to mine in the same cave, you might miss the gold in the next one.
You don’t need to make back losses in the same way you made them in the first place: Market breadth remains weak with most stocks under their 200 DMA. This implies that several stock prices are down 50-70% from their peak. Now, it's tempting to add to those positions given the drawdowns but given the market uncertainty this might not be the most prudent thing to do. For example, while we remain bullish on several tech stocks over the medium term (3-5 years), the next year or two could be rough as we cycle difficult covid comps, the market sentiment improves, and interest rates stabilize. Until then, those stocks could fall further, or at minimum, trade flat. This implies that any money invested in them at this point could be better spent elsewhere. Now there is a natural human nature to want to make money back the same way you lost it. For example, after losing $100 on the blackjack tables, many will double down to make back the loss. However, $100 can be made up anywhere, and does not need to be spent on the table again. There seem to be several opportunities to make money in the next year or two given current market dislocations. Thus, we’ve been scouring opportunities that have near term catalysts (buyouts, reopening, commodities etc) that could help make back losses suffered in tech stocks.
Be Humble: This environment is fast-changing, and each earnings season brings several broken theses. It’s okay to get out of a business where you no longer have confidence (however one must separate a lack of confidence from fear). This is hard advice to follow (and in part I write it for myself) as it’s rare that you see such a train wreck of an earnings call that forces you to sell completely. It's usually a slow boil, where things go wrong over a long period of time. That’s why assumptions need to be revisited and theses need to be rechecked. In my humble opinion this is not the time to be overly dogmatic. Your goal, first and foremost, as an investor is to make money, and that goal shouldn’t be hindered by anchoring to a previous belief, publicly stated position, accumulated loss, or “love” for a stock.
It's going to be a volatile (to say the least) period for investors, but perspective is important. We are just fighting for our net worth while many in Afghanistan, Syria, and Ukraine are fighting for their lives and those of their children. Thus, as tough as this period is, we will get through it (markets eventually rebound), and be fine. Unfortunately the lives of those in conflict zones will be changed forever.
I wish you all the success in the months and years ahead. Thanks for reading and happy investing!
Farrer Fun Fact
Stay Invested: This chart was from a fascinating report by JPM about how the 7 of the 10 best days occur typically within the 15 worst days. This makes the case for staying invested strong. (source: tweet, report)
Articles and Videos of the Week
One of the key factors in the current Ukraine/Russia conflict is how Ukraine is winning the communication war, and how the speed of information, which is unique to this recent decade, affects that. This writeup covers that concept.
This was an excellent thesis on the potential of Spotify as it looks to dominate the world of audio.
We really enjoyed this interview with Mohnish Pabrai, but that said considering what’s happening in the Russian stock market, you may want to avoid his investing advice on Turkey.
We’ve never actually spent much time looking at Tesla, but this youtube interview convinced us to spend at least some time on it in the future.
The most recent earnings and subsequent selloff was a rough one for Grab stakeholders (note: no position), but this tweet we posted summed up, at least for us, how brutal this drawdown is.