It’s been a totally terrible ten months of the year. Yeah, sure, there’s still two-and-a-bit months left of it so still time for a cheeky Santa rally but for the most part it’s been dreadful and I really don’t expect any of that to change anytime soon. Just more volatility. Yay! But what’s really caught my attention is not the wild swings in Wall Street specifically rather how fixated on the here and now markets and investors have become which I suppose explains these super-swings!
I recently started my grad role in the city and on the office floor the Bloomberg channel is on 24/7. Hearing Jim Cramer barking about stocks and hearing all sorts of presenters talk about inflation, the Fed’s rate rises, the dollar’s strength and on and on. I stopped and realised just how much of the finance world is consumed by short-term thinking.
It’s so easy it is to get sucked into it. Concerned with the next quarter and that’s it. Trust me, after hearing the finance news for a week straight it’s enough to freak anyone out. There isn’t exactly bountiful good news sloshing about now is there. But this means that many aren’t able to see past this and look years into the future. I keep reminding myself to think in decades not days despite how tempting it is to hone in on all the mad things markets (and us lot!) are grappling with.
Think beyond this quarter!
I recently read an article about how this earnings season will show if companies have coped (or not) with rising interest rates and it got me thinking that none of this will matter in a year or two years’ time let alone next decades! How companies perform in Q4 of 2022 – be it good or bad – will NOT determine their share price over the very long-term. Blips and hiccups along the way and are normal and past performance is no indication of future performance.
Businesses have, on the whole, become loads more resilient thanks to covid and they are in better shape than they were before the pandemic. Of course many are struggling with this level of inflation but the ones that are able to weather the storm will be some of the best businesses. Ever. So despite what the media reports on companies (most of it not positive btw) you must look under the bonnet and see what’s really going on. Is it a short-term problem or something that’ll go on for a lot longer? News is obsessed with the nasty negative stuff sloshing around and they’ll do their best to hammer you with it. And this triggers short-term (pessimistic) thinking.
And you wanna know when we’ve hit peak short-termism? When markets go wild about one monthly CPI inflation number. Aka bits of old data. We obviously missed estimates this month as inflation was slightly higher (0.4% to be exact) than we would’ve liked. Markets went berserk. The S&P 500 had a record day. It fell 2.5% and ended the day up 2.6%. Crazy, no?
This is a stark example of just how short-term markets (and investors) have become that they can’t see beyond this month let alone this year! Inflation is all they can think about because if inflation remains elevated then this means the Fed will have to press on with rate rises and as we’re seeing, no one is liking this. Especially not UK pension funds with their complex and convoluted LDI whatnot!
Slow and steady does it, right?
It takes MONTHS for interest rises to slowly filter their way through economies but the Fed in all its wonder realised that, oops, we’ve been ever-so-slightly behind the curve on this inflation stuff so let’s ramp it as quickly as possible but it’s kinda like pressing the accelerator when your car is knee-deep (or shall I say, wheel-deep) in thick mud. Pretty useless. You’ve gotta be patient, shove the car outa the mud and then press the pedal. Oh well.
So now, markets have realised that if inflation shows signs of cooling down even just a teensy bit it will show that the Fed’s rate hikes are working and they won’t need to be so aggressive with future rises. But sadly October’s figures showed otherwise.
Does it even matter?
Us long-term investors should be careful not to let our cages get rattled by such things! Monthly inflation figures do not matter when you’re investment horizon is literally several decades. Even if it’s a couple years, short-term data is not something you should ever concern yourself with or try to predict.
When markets are this anxious about data points you realise just how short-sighted everyone has become. And that’s precisely when you can bag stocks on the cheap. When people flog all sorts of wonderful (and perfectly functioning) investments simply because they’re following this crazily short-term narrative that’s when you know something’s gone really wrong.
But that’s not how most see it. They’re fixated on what’s going on now – and trust me, there’s plenty to keep anyone busy – but in 10 years none of this will matter. It’s all a massive distraction. It encourages a really short-term mindset. It means you’re more likely to end up trading on noise and it’ll make it harder for you to hold onto your investments for a year let alone many more to come.
I met with a renowned UK fund manager a year ago who told me his team do not focus on the macro. They’re what’s known as ‘bottom-up’ investors. They look at company fundamentals and don’t give too much energy to the macro happenings because over the long-term companies that can raise their earnings by large multiples will have share prices that reflect that.
The short-term volatility is almost always thanks to the global scene. But as time goes on, the best companies win. And it’s their earnings that end up driving their share prices – not the other way round! He told me to stick to my strategy, add a bit each month and don’t pay too much attention to the attention-seekers on the news!!
So, dear reader, unless you happen to be a hedge fund manager or a trader (I bet those FX traders are raking it in right now!) you don’t – and should never – focus on the here and now. Look beyond that and wade through all the mountains of noise.
Investing is a marathon; not a sprint. Checking your portfolio every day is much like watching grass grow. Thinking that staring at it will make it grow any faster. Look away and let it grow!
Do your best to hit mute on all this. Your portfolio – and future self – will thank you.
I’ll leave you with this quote from legendary investors Benjamin Graham: “In the short-term, markets are a voting machine. In the long-term, they’re a weighing machine”.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Leave a Reply