1) In the middle of a crisis, things are scary and the future is uncertain. Outcomes always seem obvious in hindsight. As we grow removed from each crisis, our hindsight fools us into underappreciating how uncertain it was when we were in it and misremembering how obvious it was that we would get past it.
2) Humility should be the default position when thinking about trying to outsmart the markets. Humans are comforted by predictions – about the sports game, the election, the economy, and the stock market – even if these predictions are literally of zero value. Overwhelming data demonstrates that education, expertise, and even knowledge of confidential information are not useful determinants of forecasting success.
3) Anytime we catch ourselves suggesting that anything is obvious on the investing front, there’s likely way more risk of the alternative than we perceive. There are three types of investors: 1) Those who don’t know they don’t know the future; 2) Those who know they don’t know the future but act as if they do; 3) Those who know that they don’t know what lies ahead.
4) Diversification is the best respnse to an always uncertain future. The first step to financial success is humility and admission that we cannot predict the future. The second step is intelligently diversifying across asset classes so as not to have all the chips tied to one outcome. Because things won’t turn out as most forecasters expect.
5) Patience tends to be the greatest superpower an investor can have. My good friend, David Hultsrom, recently wrote an excellent article explaining that the primary difference between successful people and unsuccessful people is their time horizon. Unsuccessful people have very short time horizons while successful people have long time horizons. Such is especially true during the most trying times.
6) It does not help to take more risk than you can stomach during good times because you will pay a hefty fine during bad times. You will do better to accept your predisposed risk tolerance, try not to stretch it, and invest accordingly so as to stomach the inevitable bad times.
7) Having a long-term plan and sticking to an investment policy usually beats speculating on the recent news, on emotion, or on short-term predictions.
8) The world always seems unusually uncertain. But it is not unusual. There are always significant risks and there will forever be scary headlines. Always and forever.
9) We never repeat the same crisis. This time is always different. But here’s what is the same: Every crisis is scary; purported experts will always opine on how much worse it’s going to get; and every crisis eventually wind down with life returning to normal and stocks fully recovering.
10) Headlines are already priced into stocks. To clarify: you are not getting the news before everyone else. In fact, you are likely getting the news long after the investor on the other side of the trade who is selling to you or buying from you. Once newspaper headlines start reporting of a pandemic or of an election result, the implications are already reflected in stock prices.
11) The stock market does not require good news to go up. It needs a less bad future than was expected yesterday. A lesson that very few investors ever learn, despite ample time and opportunity, is that stocks often fall on positive news and rise on negative news. It is not about the news. It is typically about whether uncertainty is higher or lower than yesterday and about the result today versus the expectation yesterday.
12) The stock market is not the economy and the economy is not the stock market. Say it three times. Write it down. The stock market is a forward-looking gauge of the economy, not vice-versa. Historical evidence shows that countries with the highest rates of economic growth tend to have the worst stock market returns and vice versa. The stock market is a forward-looking gauge of corporate profits. It is an aggregation of prices which move based on human perception and emotion. What the stock market does not reflect is a measure of economic growth or contraction.
13) Never underestimate the importance of monetary policy. You can perfectly predict everything that is going to happen in the future related to the economy, elections, geopolitics, inflation, etc. but all of that is largely futile if you do not correctly forecast what seven people occasionally meeting in a board room decide to do in response.
14) Market reversals are often fast and not telegraphed. At the peak of uncertainty and fear –on March 23, 2020 – the S&P 500 began one of the greatest rallies in market history. It gained 24.6% over 13 trading sessions a reasonable return for 3-5 years, let alone 13 days. For historical context, quick reversals from sharp market selloffs also occurred in 2009, in 2003, in 2011, and in 1987.
15) Waiting for “things to get better” or for “the market to settle down” is a lousy investment strategy. The worst time to invest is generally the time when you feel the most comfortable. The best time to invest is generally when you feel the most uncomfortable.
16) Waiting until election results are known and there is “more clarity” is a lousy investment strategy. See 2020, 2016, and 2012 as recent examples. Also, this.
17) In the short run, stocks move for unpredictable and irrational reasons. Knowing what lies ahead in the world does not consistently result in investment success. See numbers 3, 11, 12, and 13 above.