Justin Urquhart Stewart: A simple motto for complex times

Some sound advice from Justin Urquhart Stewart, co-founder and head of corporate development at Seven Investment Management

“Building an investment process is one thing, sticking to it come what may quite another so, to help investors keep perspective when so much is going on, Justin Urquhart Stewart offers four little words of comfort.

Investing is simple but not easy,” said Warren Buffett – and that is partly because investing can be uncomfortable and push people to do things that are emotionally difficult.

No wonder then, that it is not easy to follow the excellent advice in the old clichés. Buy when there’s blood in the streets? That is hard to do when it is your pension fund bleeding all over the road. Be bold when others are fearful? That is a tough ask when you are terrified yourself. If you can conquer your emotions, however, successful investing can indeed be fairly simple.

Two basic principles can help all of us. First, develop an investment process that focuses on the long term. Second, follow that process and employ disciplines that make you stick to it. In many ways the second principle is harder – you only have to build a process once but you have to stick to it every day. How do we keep perspective on the world when so many things are happening?

About three thousand years ago, King Solomon – allegedly – came up with a phrase that still resonates today. It does not tell us what to do – it is better than that. Instead, it reminds us of how we should think about almost anything.

This too shall pass. 

This is the perfect motto for any investor to stick above their flickering screens. Abraham Lincoln summed it up eloquently when he observed: “How much it expresses! How chastening in the hour of pride! How consoling in the depths of affliction!”

People find it difficult to be balanced about financial markets. Much of the time we are swept away by optimism and the latest new thing we read about in the papers. (Bitcoin, anyone?) Then markets plunge and we grow terrified. (What if there is another Great Depression?) As such, it is useful to try to even out our own emotional peaks and troughs – and not succumb to market euphoria or panic.

This too shall pass

After a great January 2018 in the financial markets, things began to go badly wrong. Equities, corporate bonds, oil, copper and gold all fell. Government bonds – at home and abroad – fell also and only crept into positive territory late in the year. In short, 2018 was bad.

Nevertheless, we should not let the losses we have suffered or the noisy financial headlines contaminate our view of the future. Mean reversion – the idea that good times do not go on for ever, but neither do the bad – is a powerful force in finance.

More often than not, a negative year in a major equity market is followed by a positive one. Just take the FTSE All-Share as an example – in the last 50 calendar years, excluding 2018, the FTSE All-Share has been down 14 times, with the average fall in those negative years being -12%.

Of those 14 years, nine were followed by years in which the FTSE All-Share was up, some of which were spectacular – particularly the 140% return in 1975! In other words, one bad year in the markets does not say anything about the future and it certainly should not make people change their long term investment strategy.

Sometimes, mean reversion is obvious enough that we try to take advantage of it – selling assets that look overvalued, and buying those that look undervalued. That, however, should never extend to moving an entire portfolio in and out of a position.

If things look so good, you are tempted to go and borrow money from the bank in order to invest, then do not forget…

This too shall pass

And if the world looks so bad, you cannot see how things can possibly grow better – trade wars, real wars, Brexit, interest rates – just remember …

This too shall pass

This is not, of course, to say 2019 will definitely be better than 2018. Even so, there is a good chance it will be – albeit perhaps not at the start of the year. Advisers will want to make sure their clients will benefit from the long-term trend of rising markets – regardless of what happens in the short term. That means identifying managers who keep on trying to find interesting pockets of value – all the while sticking to a stated long-term investment process.

As for the market noise, excitement, headlines and panic?

This too shall pass”