A relatively quick 5% or so market drop last month put the usual behavioral dynamics in play. Investors with most of their wealth tied up in the markets started to wonder if it was time to take some cash out before markets dropped further. People with too much cash on the sidelines thought about taking advantage of the market drop to make good on their long-standing wish to start investing whenever the market turned lower, only to hesitate just in case markets dropped further still. Accompanying this was the expected backdrop of media stories and interviews playing up concerns about a whole host of long-term economic concerns such as inflation and interest rates now combined with newly discovered hazards like supply chain disruption and rocketing energy costs. Did I mention the concerns over COVID, Chinese belligerency over Taiwan and the toxic US political situation? That is not to dismiss any of these potential problems and issues but merely to point out that we increasingly inhabit a traditional/social media echo chamber that amplifies fears and concerns. A successful investor must be constantly on guard against being swamped by a wave of short-term negativity and pushed out of a long term, diverse portfolio of profit-making businesses.
How then to avoid being prevented by the fears of today from enjoying the fruits of an increasingly productive and innovative world economy? I would say two requirements stand out: (1) knowing the world; and (2) knowing yourself. Each one of those requirements should then be split into two questions (1) what does the future hold and require; and (2) what is going on now that I need to consider but not be paralyzed by?
Let's take the first requirement, knowing the world. That may sound a little glib, how can we possibly know the world. There is certainly much we don't know -- about the future, about what is going on in the backrooms of government offices, or the research labs of top corporations or academic institutions. However there is a lot about the world, and where it is going, that we do know just by being an economic participant in that world.
We can see the transformation of banking and finance by technology. We have all experienced the transfer of shopping from sidewalk stores to laptops and phones. We have all heard about the remarkable developments in health and medicine by the knowledge and testing of the human genome. The use of artificial intelligence has revolutionized the fields of marketing, scientific research and data management.
All of these observations about where the world and business are going are fully investable today in known, substantial enterprises that are visible, not hiding, in plain sight. Combine a logical and reasoned outlook on the factors that are changing the world for the good for consumers and businesses alike with a more short term appreciation of the obstacles that may be temporarily in the way of a better product, industry or economy as a whole, and you can create an investment portfolio that is truly a product of value investing, buying pieces of a portfolio at far cheaper prices then the entire portfolio should be worth in the future.
In some ways, the knowing the world part of investing may be easier than knowing yourself. For ourselves, part of the future is readily knowable. We know about how much we need to save for our children's college education. We have some idea how much we will need in retirement even if we don't know for how long. But what about the here and now? How much risk can you tolerate on a day-to-day basis? What are the odds that you will need a substantial amount of cash in the next six months for a medical expense, to cushion against a lost job or poor investment, or even to buy a new house? These are the types of knowing yourself questions that must be merged with knowing the world to have a successful and resilient approach to investing in an uncertain time, to enter the fray of being a full global economic participant and, hopefully, a good investor, who can accumulate wealth to achieve economic security and freedom for ourselves and our families. As always, Arrival Capital is here to help.
Enjoy the Autumn!