“The stock market has predicted nine of the last five recessions” – Paul Samuelson
Climate catastrophe. Inverted yield curve. New normal. Democracy in danger. Refugee crisis. Nuclear powers face off. Rage on the streets. Swiggy cutting discounts.
When I read headlines, I can’t breathe. And I don’t even live in Delhi. Since investing is premised on sound long-term prospects, my day-job almost seems sinful amidst this Armageddon. Every time I buy a stock, I hear a kid screaming “HOW DARE YOU”!
This negativity instinct …
Hans Rosling best described our instinct to notice bad more than good. We tend to romanticize our past. Since bad news sells, media makes the present seem even worse. As long as bad things abound, it feels heartless to acknowledge progress. Other behavioural quirks reinforce this negativity instinct. We overweight recent information, especially if it is stark and easily available. We are moved by anecdotes and feel compelled to string them into a (sad) narrative. And once we sense decline, confirmation bias takes us down the rabbit hole. Before long, we’ve made a down payment on a doomsday bunker.
… is injurious to financial health
For most, shortest path to secure retirement is to (a) invest regularly in index funds and (b) let it lie. Misguided alarmism interferes with both. Gloom makes amateur investors stop or withdraw SIPs precisely when markets are undervalued. Their retirement plans suffer a double blow, with too little money invested for too short a time. During the same grim period, professional investors freeze into inaction or cash. Short-termist financial commentators worsen the damage. ‘Permabears’, who sound smart but die poor, find their voice again. Empirical evidence on timing of money flows in and out of markets reveals substantial damage. Premature evacuation has left equity investors poorer by 50-80% at retirement. But, there’s a pill for that.
History over headlines
How do we prevent fear of imagined Armageddon from causing real financial Armageddon? Stop reading news. If that’s too extreme, weight history over headlines. You may even end up with a positivity instinct. Hans Rosling refers to this as the secret silent miracle of human progress. Humanity’s most famous doomsday prophecy was made by Thomas Malthus in 1798. We have since proved him wrong, in style. Not only did we avoid his prediction of mass starvation, but did so in a world that has many more people living way longer. I can share many more illustrations of this miracle, but you’ll be better off reading Bill Gates’ blog. Markets also benefit from this miracle of human ingenuity. In 1979, Sensex was set at 100. Since then, we’ve seen assassinations, separatist movements, mass agitations, balance of payment crisis, Kargil war, dotcom bust, global economic crisis, $150 oil, stagflation, Karat-Yechury reigning and Dravid-Laxman retiring. And India’s fine. We even won a test series in Australia. Sensex rose 400x in these 40 years. That’s 16% a year, with dividends on the side. The people who didn’t benefit from this were those who took headlines too seriously.
This theme goes way beyond money. My five-year old learnt about climate catastrophe in play-school, in dire terms. Without denying climate change, this is a warped perspective, especially in formative years. Before getting guilt-tripped out of lighting a single firecracker on Deepawali, he should be taught the little miracles that made the world better: germ theory of disease, vaccines, doctors washing hands, Haber Bosch process, sanitation, randomised control trials, crop science, refrigeration, catalytic converters, instant noodles. He should appreciate human ingenuity and progress. He should trust our historically-grounded ability to solve problems, before being exposed to the current list. At best, he may be inspired to become a problem solver. At the least, he won’t end up gluing himself to a bus. Let him worry, but in a constructive way.
Glass half empty or full? Both.
Good investors are glass-half-empty people. They are deeply skeptical about everything, starting with their own abilities. This extends to businesses and the people running them. They deem over 90% of all businesses as unbuyable at any price. Shouldn’t such a jaundiced eye be in conflict with a cheery faith in humankind? At the least, isn’t there dissonance?
A sensible approach to investing reveals this to be a false binary. I buy understandably good businesses run by trustworthy people at sensible prices. This is sometimes labelled ‘bottom-up’. I evaluate one business at a time, focusing on ‘micro’ factors related to company and industry. I fuss over minutiae in a balance sheet. I seek evidence, beyond reasonable doubt, on trust and competence. This makes me a micro-skeptic. However, this approach has no role for generic ‘macro’ factors. Investments aren’t premised on GDP growth, commodity prices or election outcomes. This allows me to ignore ambient negativity. I can be micro-skeptic and macro-sanguine at the same time, without dissonance.
Although I try to ignore headlines, I am not immune to them. It is scary when something goes bump at night. While it’s natural to tremble, the key is to not freeze or flee. That’s where history helps. It tells me that fear is my friend. How else do I get low prices on good businesses? It tells me that India, world and markets will muddle through. This too shall pass. Keep calm and carry on (investing).
(This is an essay I wrote in January that touched upon the same themes I covered in my most recent Believer vs Skeptic essay. Originally published at https://www.linkedin.com/pulse/false-alarm-dont-let-headlines-ruin-your-retirement-anand-sridharan/)