Learning The Wrong Lessons

What a few months we've had!

I think we'd all rather look ahead than dwell on the last few months, but it's time to take stock. Lest we forget, as they say.

First the facts:

In a matter of 28 days the market "lost" approximate 34% of its value. The same businesses with the same managers became a third less attractive because of short-term uncertainty.

Since then, in a dramatic turnaround that is just over 100 days old, the same market has gained about 28%.

Was it possible to predict either the sudden downturn or the remarkable recovery? Of course not. Was it possible to predict BOTH? That's crazy talk.

As behavioural financial advisers we know that the future is essentially unknowable. That's why we craft plans that will stand up to the vagaries of the market. We know that it's not a matter of if the market will experience volatility (up and down), but a matter of when it will happen.

We've learnt this lesson by observing the history of the markets.

It is evident that not everyone has internalised this lesson. In fact, it is extremely worrying that many have learnt the opposite lesson.

It is human nature to want to be in control and to extrapolate the recent past into the future. While those who have studied the markets know that trying to time the market's inevitable ups and downs is a fool's errand, many have decided that it is both possible and a worthwhile pursuit.

We know that amongst us walk financial literates and financial illiterates. Let's look at what lessons these two different types of people may have taken away from the recent crisis.

The literate investor would have been reminded that markets can go down a lot, often without warning. They would have been reminded that the market does not follow the economy, often recovering long before economic data suggests that the future is looking brighter. They would have been reminded that it is always a good time to buy shares in the great companies of the world, and never a good time to sell unless the money is required. They would have learnt to focus on what they can control.

In contrast, the illiterate investor would look back on the market and convinced themselves that they saw it coming and should have done something about it. We could see the warning signs in China! They would have connected the dots between the market drop and any one of the regular articles warning about a coming crisis. They would convince themselves that the recent recovery isn't sustainable, and now might be a great time to sell and wait for the next market drop. After all, the economic data coming out isn't great, the future is extremely uncertain. If they avoided selling at the bottom, they would convince themselves they have the ability to predict the market, reading everything they could to stay "informed" so that they can predict the next crisis too.

We encourage you to take stock, examine your actions of the past few months, and consider what lessons you can carry with you on your investing journey. Which investor are you?