Regrets, I have a few… How much should we use the past as a guide to the future when investing? In my postscript I take a light-hearted look at one certainty.
Market Commentary
UK inflation stalled temporarily but will continue to reduce, interest rates to follow.
What normally happens... Déjà vu all over again?
The past is the only guide we have to the future – and the big investment picture is economic cycles, these move in waves – boom, slowdown, recession, recovery, and repeat. Of course, there is no guarantee of the length of waves or the depth of the sea, as it were.
Governments try to moderate markets in two main ways; monetary policy (control of the money supply and hence interest rates to promote or suppress borrowing) or fiscal control (taxation and Government spending) to try iron out economic peaks and troughs.
With me so far?
OK then, this is dead easy – all we need to do is invest at the right time in the economic cycle and wait for the money to roll in? Almost correct, but…
Timing
Where are we in the economic cycle – are we at the bottom or will it fall further? Are we at the top or will it go up more? Factors that affect this cycle include the following:
People
Self-interest, in the form of fear and greed (assisted by the media) affect markets. Herding is part of this - ever felt the impulse to join a queue just because there is a queue? FOMO is the greed bit, it means fear of missing out, this is like queuing at the bar. Of course, corporations and funds are run by people, for the time being.
Knowledge
Knowledge conquers fear; people are getting better at understanding financial matters and this can lead to them taking more risk – unless they have previously had their fingers burnt. This latter point explains why market falls are sometimes extended even when conditions have improved – singed people stay frightened.
Governments
I need to be careful here but one of the issues is short term thinking, driven by the political need to be re-elected. Governments that are run well look after the vulnerable whilst promoting trade to pay for it via taxation.
Outlier or ‘black swan’ events
So – some variable stuff but mostly predictable, subject to timing. However, when faced with the Four Horsemen riding out, things get tricky. We have had plague, conquest, war, and famine (sadly) is ever present. It is to be hoped that these lot don’t saddle up too often.
Summary
We can and should use the past as a guide to the future but cautiously. Most aspects of market and human behaviour repeat over the years, and these can provide a useful guide when investing.
It is human behaviour and the force of habit that I believe will now make markets revert to the norm, and it is in our opinion that the next couple of years will be more productive.
p.s.
Death (where the past IS a guide to the future) - Coffin Clubs.
We often discuss dying with clients who want to direct their money to the right relatives (and very definitely away from those who they will never forgive for marrying wrongly / not visiting / not sending birthday cards / what Fred did at the last family do etc).
Older people seem to enjoy our talking to them about death since most of their younger relatives treat the issue with far too much delicacy using phrases such as ‘if you die’ which is nonsense since it should read ‘when you die’. Some of our clients have even joined ‘Coffin Clubs’…
Coffin Clubs exist (and I quote) to ‘empower people to take control of their final send-off’. Another description I have seen is ‘an educational platform for all your end-of-life, funeral and bereavement choices!’ CC’s appear to be jolly little social clubs where you can have a chat about your final curtain – and how to kick the (champagne) bucket in style.
I was quite amused to learn of CC’s – and death, inheritance and succession are drivers of economic change.