The events of the last few months have left the majority of us feeling like we have no idea of what is going to happen next. No-one could foresee that a global pandemic would shut down the world economy, or that half of the world’s population would be in lockdown. Nor could we have fathomed the extent of the widespread social cost. Many have argued (with the benefit of hindsight) that it was only a matter of time, although in February the general feeling was that world markets had largely shrugged off previous infectious diseases such as Swine flu, Zika and Ebola.
Knowing all this, have recent events at least now given us a better idea of what’s going to happen in the next 12 months?
We would certainly hope so – our thoughts on where the world was at the beginning of this year undoubtedly now appear inconsequential.
Yet what have we really learnt from this?
Well, one thing for certain is that any assumptions you have about the future can be destroyed overnight, and that’s true for the poorest to the most successful. It was true before the Covid-19 crisis, and it will certainly be true again in the future.
Two completely opposite outcomes are equally plausible here – if a vaccine is developed quickly, optimism will return to markets, fast. Similarly, a renewed wave of infections could result in another sell-off.
And in a world where fundamental assumptions are so fragile, what should we be doing about it?
The value of history
As a starting point, we would probably read fewer forecasts, and a whole lot more history. Most fund managers don’t claim to be able to predict the future. It goes without saying that those who claim the ability to foresee events can’t then use an unforeseen event as an excuse. The astute ones have realised that history gives valuable insight into how people respond to an unforeseen event – patterns of behaviour can give us a much better idea of what will happen next.
We don’t know when the recession will end, but history has taught us that while an event of this magnitude can’t be ignored, progress generally goes unnoticed. Which shows us how important it is to maintain optimism about our investments even if the economy looks like it may never recover. But recover it will.
Although we can make some reasonable estimates based on the industry, we can’t predict which companies will survive this crisis. But we do know that historically, it’s normal for many of the companies on the JSE (or any stock market for that matter) to perform badly, while a small number do exceptionally well and drive most of the returns (Naspers is a case in point). The best way to protect yourself is to be well diversified, and to avoid taking one-way bets, on companies as well as specific sectors.
Reasonable expectations
The biggest lesson from the last three months is that whatever your view of the future is, it’s probably wrong. Things change in ways people can’t imagine at times they never considered. Attempting to forecast what will happen can lead to overconfidence, and that in turn can lead to poor investment decisions.
A more pragmatic approach would be to accept that every now and then, probably once or twice per decade, there will be a major event that will turn the world upside down, and that will result in a market sell-off. Accepting this makes it easier to prepare for an event that you can’t foresee, and to avoid making emotional decisions with your money. Remember that no business model or investment strategy is proven until it survives a calamity – the term “recession-proof” is no longer being used with such enthusiasm.
And our advice for any of the possible outcomes? Stay diversified and stay invested.
In the words of Daniel Kahneman: “The correct lesson to learn from surprises is that the world is surprising.”
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