Here’s a relatively recent example of this tendency to “get out” at any cost. In the 4th quarter of 2018, the S&P 500 logged a 19.8% draw-down from the high on October 3 to the low on December 26. True to form, “investors” sold $83 billion worth of equity funds and ETFs in December alone!! That’s a record outflow, according to data from EPFR Global. That 19.8% drawdown was very short-lived, however and subsequently the S&P 500 rallied 10% in just a few weeks.
In other words, investors locked in $83 billion worth of losses. This is yet another unfortunate example of how market timing causes most investors to underperform market indices over time. The public buys the most at the top and the least at the bottom – fear and greed are much stronger than long-term resolve. This has always been true, and we doubt human nature will ever change.
As you all know, this is in absolute opposition to what our client’s mangers were doing during all of that turmoil. Of course, they weren’t selling into that bear market – they were busy buying – taking advantage of that very brief sale – using the cash reserves they had been building up while the market became more and more expensive.
Charlie Munger said this about making money in the stock market: “None of this is supposed to be easy and anyone who thinks this is easy is stupid.”
We couldn’t agree more with Charlie Munger. We are absolutely fascinated with financial markets & human behavior and although it may not be easy, we are very confident that our disciplined, fundamental approach to investing is the very best way to both grow and protect wealth for our clients.
Stu recently sent a note to one of our clients, and in one paragraph he summarized a good deal of what we believe to be true:
‘There is no better strategy than this: a beautifully diversified collection of the great companies of the world selected by the best money managers anywhere. It’s diversified based on industry, geography, size of business and investment style. The managers themselves are big investors in the portfolios we own – so everyone’s interests are aligned all the way through the supply chain.’
Makes sense to us, we hope it does to you too.