News and Markets

I have to admit, many of these articles I write end up being about not listening to the news. This isn't me declaring "fake news" when seeing opinions I disagree with. These articles are filled with interesting information about investment markets. The problem is this information is seldom useful for making actual investment decisions.

As you can guess, I have already started writing about the same topic. I was spurred to do so by something that made me laugh this morning. I was checking on the S&P 500 index to see how markets were doing. After seeing the index was flat for the day, I clicked on Google's news tab to see what the headlines were saying. Scrolling down, I saw the following headlines in a row.

In case you aren't familiar, Jim Cramer is an ex hedge fund manager who currently hosts Mad Money. On this show he tells investors which stocks to buy and which to sell. He is probably the most recognisable market pundit on television.

The article was from five days ago. The headline has Cramer suggesting the US share market would be falling for days. Clicking back to the S&P 500 chart and choosing "5D" as the timeframe, here is what I saw.

The market shot up 6.5%, over a pretty consistent 5 days! I couldn't help but chuckle, especially noticing the article just beneath Cramer's was titled "Stock Pickers Watched the S&P 500 Pass Them by Again in 2021". I wonder why?

Unfortunately, investors heeding Cramer's advice would again be watching the index pass them by. It will be suprising to many how listening to the most recognisable market commentator ended up burning them like this.

However, looking at the index from the start of the year, it is understandable why some investors may worry.

At the time this article was released, the market was down 13% since the start of the year. It is during times like this, when markets are down and the financial news is gloomy, that even experienced investors can get nervous. You cannot look into future to check who has it right.

But history has shown that those who try to time the market or pick stocks do worse on average than the patient, disciplined, long-term investors. This is demonstrated again by the article under Cramer's.

The other important thing to note is how important keeping the right perspective is for investing. One of the most common cognitive biases for investors is recency bias, where investors react more strongly to recent events than older ones.

I understand why many people would be concerned looking at the red graph above. With all the talk of Ukraine, inflation, interest rates etc., who wouldn't be worried?

But over the last two previous years we fought a global pandemic while stock markets surged. Here is the S&P 500 graph stretched out to 12 months.

A 13.1% return is very good for shares. And this 12 months includes the period this year when US shares were down 13%!

I do not doubt that if these 12 months started with a drop of 13% and then powered ahead to where we are now, investors would be much more confident moving forward. It is recency bias which convinces us that the two situations are different, despite the outcomes being the same.

Of course, investors should always consider long-term outcomes. Here is the S&P 500 over 5 years.

The takeaways are clear. First off, even experienced market commentators don't know where the market is headed. While financial news may be interesting, there is no information in these articles that is not already included in market prices.

Articles written during times of uncertainty are not only more frequent, but also more likely to illicit an emotional response. It is important to keep a cool head before making investment decisions, which is difficult when bombarded with scary headlines.

Lastly, a long-term perspective shows, despite ups and downs, markets reward disciplined investors over time. Recency bias leads investors to place too much importance on recent market movements. For many, this influences their decision-making and leads to poorer returns over time.

With long-term investing, cooler heads will prevail. Try not to worry about what commentators are saying about where markets are headed. Instead remain focused on your own goals and a long-term perspective

Regarding Ukraine

The Russian invasion of Ukraine, which continues to develop as I write this message, has shocked the world. Our hearts go out to the millions of Ukrainians facing the horrific and senseless violence set in motion by Vladimir Putin.

As Russian sanctions are being introduced by the US, UK, Europe and other major nations, many have been asking about their own investments. The portfolios we build for our clients, being globally diversified, include a small exposure to Russian shares.

The Emerging Markets Value Trust, a fund investing in companies from 22 developing nations, includes a 1.54% exposure to Russia as of the 1st of January. The fund itself represents 15% of our portfolio's share exposure, so roughly a quarter of a percent of shares in each portfolio are from Russian companies.

However, yesterday Dimensional released the following statement regarding their investments in Russian securities:

On March 1, 2022, Dimensional’s Investment Committee removed Russia from its list of approved markets for investment. Dimensional’s Investment Committee considers a variety of factors when evaluating a market’s eligibility for investment, which include, among others: government regulation, restrictions on foreign investors in that market, and market liquidity.

If you are interested in how markets reacted to Ukraine's invasion, a recent webcast by Dimensional discusses their interpretations in depth. Another article discusses how flexibility and diversification helps Dimensional manage investments during times of geopolitical uncertainty.

Investing in the Here and Now

During our first lockdown in early 2020, I became enamoured with the game of chess. My dad taught me how to play when I was very young and I remember being part of a club around this time.

When I picked it up again, I believed (quite naively) that I would be quite good, owing to my background. A very humbling experience followed my introduction to online chess. I lost many games.

However, over time I started winning more and my chess score (ELO) began to rise again. Quickly I became good enough for my Dad to no longer want to play me.

I learnt many things about the game during this time. Most people seem to believe you must be very intelligent to play well. It is a trope often used in film, such as when Sherlock Holmes plays Moriarty, or HAL from 2001: A Space Odyssey (a computer beating world champion Garry Kasparov happened earlier, in 1997).

In actuality, pattern recognition is much more important. Although the number of unique chess positions is inconceivably large (more than 70,000 after only 4 moves), certain patterns are prevalent across games. Learning checkmate patterns, tactics and key concepts will give you more of an edge than a few IQ points.

As with all games and sports, practice makes perfect (well, you need a computer to play perfectly, but practice helps). Playing game after game solidifies important patterns in your memory and helps you identify your mistakes.

But the key to it all is what makes chess such an engaging game. In any given position, there is a best move and both players are trying to find it. The game continues like this, move by move. The better your opponents, the less room for error, as even small mistakes may cost you the game.

While I don't truly believe being a good chess player improves your problem-solving skills away from the board, this method of trying to find the best move each turn does hold relevance in other areas of our lives.

I find many investors feel the need to react to current events. With the third year of COVID in front of us, there has been a lot to react to. Interest rates are very low, but were constantly threatening to rise. We've seen inflation spikes as we emerge from lockdowns. We've just had two years of share prices soaring while economies struggle on. It is understandable if these events drove some investors to act.

In a chess game, it is common to get frustrated after making a bad move. This leads to more bad moves and usually resignation. I have personally thrown winning games due to overconfidence and carelessness. Games are won by consistently looking for the best move.

During March 2020, NZ saw record flows between KiwiSaver funds as people reacted to plummeting share prices. Those investors who switched to defensive funds missed out on a rapid and persistent rebound. Those who stayed put did very well over the year.

On the other hand, other investors believed share market gains were unsustainable moving in 2021, with the S&P 500 index up 16%. The index would go on to gain more than 25% last year.

Lastly, many investors are tempted to invest more aggressively when the going is good, such as moving more capital into shares. Without proper consideration of their goals and risk tolerance, this can lead to excessive risk-taking.

Even if their decision-making wasn't perfect, these investors should start thinking about their next move. Maybe they sold all their shares in fear during March 2020. The next best move may be to purchase shares again. Good decision-making is about what is best here and now.

Investment decisions can have considerable impacts on a person's long-term wellbeing. Before we make these decisions, we need to see the whole board. It shouldn't be about reacting to what happened yesterday. Not only can we not change the past, but we also know this isn't useful for predicting the future.

Much like a chess game, investing should be about making the best decision for the current moment. This isn't always easy if we are bombarded with distractions or haunted by past mistakes. Don't let that distract from looking for the next best move. Your future self will thank you.