In the lead up to 2020, a timely New Year's resolution would have been to try to see things more clearly in the new year, as in 20/20 vision, which is defined as "normal visual acuity (the clarity or sharpness of vision) measured at a distance of 20 feet. If you have 20/20 vision, you can see clearly at 20 feet what should normally be seen at that distance. If you have 20/100 vision, it means that you must be as close as 20 feet to see what a person with normal vision can see at 100 feet." But 20/20 vision does not mean perfect vision only "the sharpness or clarity of vision at a distance." In the investing world, many seek the ability to see what is ahead in the distance. After all, who would not want to be able to know what stocks will go up (or down) the most in the year ahead. But people are usually kidding themselves if they really think they or anybody else has such unique foresight. Often people project what has happened in the past and convince themselves they know what is going to happen in the future. Or perhaps investors hear a prominent person in the media give their own forecast of the future and then figure they too are in on the secret of what the future holds. No, in investing, as in other fields, trying to "see" the future is a fool's errand.
But just because investors can't "see" the future doesn't mean we can't try to prepare for it. First, we can strive to know the present as well as we can. We can also seek to understand the range of possibilities that are likely to come about in the near to medium time frame. In quantitative terms, we can assign future probabilities based on current facts and historical patterns. In terms of famous sports sayings, we can, as Wayne Gretzky once remarked, "skate to where the puck is going not to where it has been." The past and present are often the best guide to what the future might hold in regards to business and product trends, financial conditions and policy changes. But we also know there is a lot we do not know about the year to come. Who will win the election? What international events might roil business plans?
When Arrival Capital manages the hard-earned and critical capital of its clients, we always start with what we know -- about product trends, financial conditions, asset values, and, perhaps most importantly, about our clients.
What are their financial needs, goals and challenges? Investing is always a mix of the world at large and the intimately personal. Only when we know our clients can we place their financial and investing needs in the larger context of where their wealth should be placed in an evolving economy, with growing and declining businesses, fluctuating inflation and interest rates, all amid an uncertain political environment. Another thing we can know about the future is that facing it with a diversified portfolio of investments with compelling intrinsic value is a better way to proceed rather than with a thoughtlessly aggressive mix of similar stocks that everyone seems to be piling into, even in supposedly safe index funds. Diversification also beats a fearful portfolio comprised of cash and fixed income earning next to nothing.
The final way to "see" clearly, in 2020 or any year, is to understand the underlying mood in the market, whether in relation to the market as a whole, a particular industry or in an individual stock. "Mood" might seem like kind of a squishy term, but when viewed in the context of behavioral economics and contrarian investment theory, we can undoubtedly point to the chronic over and under reaction to market news, and periods marked by doom and gloom on one end, and euphoria on the other. On Christmas Eve 2018, with the stock market down almost 20% from its highs, you could feel the doom washing over the investment world and the media that cover it. Yet the numbers coming in did not seem so outlandishly bad. Nor was it unreasonable to expect that the Federal Reserve would reverse course and cut rather than increase short-term interest rates, thus removing one of the principal reasons stocks were headed lower in the first place. Know the present! For investors that kept their cool, analyzed what was happening and made their best guess as to what was likely to happen, they were able to set up for an exceptionally good 2019. Employing the same tools for 2020, and trying to see clearly, Arrival Capital will keep clients on the right path to a future of increased wealth and financial security.
