This week, in our last episode of the year, we will explain in more detail what our investment outlook is for 2023. We think next year will see continued volatility, potentially with further bouts of selling in markets. We could even see recession in some parts of the world. But, we also think 2023 could be a once in a decadeopportunity for investors.
A critical factor in success for investors will be to disconnect emotions from investment decision making. In fact, investors need to consider doing the opposite of what emotions may be telling you to do. When consumer sentiment and economic outlooks are at their most pessimistic has in the past often been when asset valuations are at, or close, to their lowest levels.
This makes sense if you think about it. What is a valuation? It is the price that the market has placed on an asset, any asset, it could be a stock, a bond, a property. The market is a collection of human participants and the collective emotions of those participants will, if strong enough, be reflected in market prices and asset valuations. If the consensus among those participants is one of economic gloom and pessimistic sentiment, this will, all else being equal, be reflected in lower prices and lower valuations for those assets.
It is precisely at these moments of widespread pessimism that investors with a long-term horizon can make potentially life changing investments.
Markets, being a function of collective human psychology and emotions, are, just like their human participants, prone to overreact. This works in both directions. Markets are prone to be overly optimistic when times are good, especially if the last ‘crisis’ or recession was a long time ago. Last year, 2021, was a classic example of this overly optimistic behaviour of the market, with valuations and prices peaking at unsustainable levels. Those are good moments to sell assets, rather than to buy.
Similarly, when the economic environment deteriorates, markets have a tendency to overreact to the downside, with too much pessimism and overly negative price behaviour in stocks and other assets. These can be very good moments to buy assets, especially if investors can remain patient and hold investments through volatile periods.
This year has already seen major declines in stock and bond prices. This has made the valuations of those assets lower and thus more attractive from the perspective of the patient buyer. We think next year, 2023, and the likely continuation of uncertainty, volatility, and potential weakening of economies, will thus also offer the patient investor opportunities to invest in quality stocks and other assets at very attractive valuations.
In some cases, we’re already there in terms of pessimism being widespread enough on specific asset classes or even some individual stocks, where the moment to buy is now. Some emerging markets, for example, offer very attractive long-term investment outlooks at current prices. There are also examples of developed world stocks with high quality businesses, which when we look at their share prices it is clear that the market is exhibiting an unwarranted pessimism, and thus, the opportunity is presented for us as patient investors to buy.
This is why, looking into 2023, despite the worsening economic outlook, rising interest rates, bear market in stocks and bonds, and continued war in Ukraine, we are quite excited about the investment outlook. The more widespread the pessimism, and the greater the consensus in that overly negative outlook for the world economy, the more opportunities we will have as patient investors to buy high quality, long-term investment assets at low prices.
Low prices for quality assets = much higher expected long-term returns. Bring on the pessimism, bring on the negativity, and we will ready to buy!