“If you can keep your head when all about you
Are losing theirs and blaming it on you,
If you can trust yourself when all men doubt you…
Yours is the Earth and everything that’s in it,
And – which is more – you’ll be Man, my son!”
The above is an excerpt from Rudyard Kipling’s poem ‘If’ published in 1943 and along with its beauty it is a worthwhile exercise for all investors to read the poem in its entirety. Valuable life lessons often translate well into being valuable lessons for investing successfully over the long-term.
Getting too wrapped up in the short-term, allowing concerns and worries about the state of the world to engender fear and an emotional reaction, these are normal human traits which afflict us all. When Kipling talks about keeping your head, he is referring to the difficult but important trait of staying calm and maintaining a clear head during times of difficulty or crisis. This is especially important ‘when all about you are losing theirs’.
Financial markets are, at heart, a collection of the human emotions, desires, and intents of the people participating in buying and selling securities. The accumulation of this fear, or greed, optimism, or pessimism, is translated into moves in the prices of stocks, bonds, properties, etc. Dramatic shifts up or down in share prices, for example, reflect the shifting moods and emotions of the collective. During times of bullish optimism, this translates into market prices soaring higher to reflect this mood, and vice versa, sudden lurches down in price usually coincides with the fear and sometimes panic felt by the market.
Kipling’s advice to ‘keep your head’ works in both super-bullish and extremely bearish periods of markets for investors. In both cases the collective and prevalent emotion of markets has gone too far, the market has ‘lost its head’ and is pricing in either far too much optimism (in the form of extremely high valuations) or too much pessimism (very low valuations). The investor who can keep his head through these periods where ‘all about you are losing theirs’ is in a strong position to benefit and take advantage.
While we are not currently in a time of extreme panic, it does seem to us that many market participants and commentators are losing their heads (just a little bit) when it comes to assessing the current outlook for financial markets. The recent escalation of the conflict in Israel-Palestine is the latest in a series of geopolitical events to have spooked markets and investors into taking risk off the table, despite history clearly showing that wars have never been a good reason to reduce equity market risk exposure.
When confronted with a new and unexpected emerging risk, whether it be a war, pandemic, risk of recession, whatever the case may be, for those of us who own our homes (for example): do any of us rush out to immediately sell that home?
What about those of us who own their own business… in the face of the invasion of Ukraine by Russia, do we rush out to immediately sell that business?
The answer in both cases is an obvious and resounding ‘no’.
None of us in our right minds would see the unfolding (and tragic) events in the Middle East, or a short-term bout of economic weakness, and conclude that we must sell our homes, or sell the business we have spent years building.
The reason we quite rightly would not do that is because we understand they are long-term investments. We instinctively understand that the home we have spent years saving for, renovating, living in, etc. or the business we have invested so much time in building, these are long-term, long-duration investment assets and their long-term values will remain robust despite the risks we see written about in the news.
Yet when it comes to our investments in equities, this discipline is often forgotten, to our own detriment as investors.
An investment in high quality businesses in healthcare, technology, energy, consumer goods, etc., is a long-term investment and should be treated in the same way we would treat our investments in our homes or a private business.
An investment strategy focusing on investing in the equities of high-quality global companies is precisely that, you are a business owner (via your equity stake) of some of the highest quality growing businesses, with the leading technologies which are transforming our world. To abandon these investments casually because of short-term emotions is a fundamental mistake, and what is more these periods of short-term weakness and fear should be taken advantage of, investors should be buying into them, not selling.
Are you thinking about selling your house after a 10% correction in S&P 500 or news about another war in the Middle East? Of course not.
Then why are any of us thinking about selling equities?