The Long and Winding Road

Q2 | June 2022

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John C.A. Stevenson, CFA

June 22, 2022

Image used with permission: iStock/Daniel_Kay


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The Long and Winding Road

Q2 | June 2022

Reading the newspaper is an unsettling activity these days. In almost every facet of life there is a concern that can rattle even the most stoic individual. Perhaps the most widespread of these is the surge of inflation. It is felt by us all when we stare at the total on the gas pump or look at our bill from the grocery store.

A year ago, central bankers were uniformly sanguine and insisted that price increases were “transient”. But recently, prices have been rising at the fastest rate in 40 years and the increases are proving to be more persistent than anyone expected a year ago. A consequence is that a recent survey by the University of Michigan showed consumer confidence to be the lowest on record despite high levels of employment and excess savings.

If inflation isn’t sufficiently worrisome, there are many other concerns. In order to rein in inflation, central banks have become increasingly aggressive about raising interest rates. Higher interest rates present a significant headwind for house prices. Much of the extraordinary rise of wealth in Canada and the U.S. over the last several decades has come from the unrelenting increase in the value of houses, the largest asset in almost every person’s portfolio. Equally worrisome is the possibility that if central banks raise interest rates too high too quickly, the resulting decline in demand for goods and services would plunge our economy into recession. Reflecting these concerns, the S&P 500 recently slipped into bear market territory.

Of course, the human tragedy unfolding in Ukraine, and the related concerns about global peace and security, have many of us on edge. Similarly, lockdowns in some of China’s biggest cities and renewed worries about its precarious real estate sector present a serious threat to global growth and financial stability. I could go on, but I expect that you get the point.

Any one of these factors would be a serious concern, but the confluence of them creates an outlook with great uncertainty. Surely, a prudent investor ought to tread cautiously with their investment decision-making. Perhaps some of your friends and neighbours have sold all their stocks and are taking solace in the cash they have accumulated. No doubt they feel good about their decision in the face of all these grave economic and geo-political issues.

Human instinct is to “do something” when the future is uncertain. This is a topic that we have addressed several times in the past but, given current circumstances, it seems appropriate to discuss again. Clearly, if one could predict exactly when a major market downturn was about to occur and predict exactly when an uptrend was about to start, one could make a lot of money trading out and then back into the market. However, getting lucky once or twice with such a prediction is insufficient. One needs to be able to accurately predict market movements repeatedly in order to succeed with the strategy over the long term. History has shown that human beings are remarkably ill-suited to do this.

Investors all know that the principle of “buy low and sell high” results in investment success. However, the evidence shows that investors do exactly the opposite – they buy high and sell low. It feels good to be buying when times are good and stocks are soaring. It feels smart to be selling when the news is bad and stocks are slumping – as is occuring right now.

We believe that long-term investment success comes from time in the market, not timing the market. If we accept the fact that we cannot consistently predict the future, the only approach that makes any sense is to buy and hold good quality stocks through good times and bad. A simple but powerful chart was recently printed in Barron’s based on an analysis done by Fidelity Investments. It looks at the fantastic returns that accrued to those who invested in the U.S. stock market over the 40+ years between January 1, 1980 and March 31, 2021. Over that period, a hypothetical $10,000 invested in the S&P 500 turned into $1.09 million. Over the course of those years, investors endured many disasters: the stock market crash in 1987, the Asian currency crisis in 1998, the tech bubble collapse in 2000, the Global Financial Crisis in 2008/2009, and many other bear markets and temporary meltdowns. What the chart shows so powerfully is how devastating it is to long-term returns to miss out on a few good days of market rallies. Moreover, these best days in the market often come as a bounce in the middle of a downturn, or a strong recovery just as the market bottoms – both points in time when our market timing friends are likely to be sitting on the sidelines.

The history of Nexus also demonstrates how sticking with our holdings benefits our clients over the long term. We’ve endured many gut-wrenching set-backs, all of which felt awful at the time. You can see these highlighted in the following chart. But each set-back was followed by a strong recovery. The long-term record is clear. This message is not new, but it is one that is useful to remember at challenging times like the present.

 

The moral of the story is that patience is one of the key virtues in the investment world. Investing is a long and winding road. There will be ups and downs. There will be moments of fear and moments of euphoria. Remaining disciplined and not letting emotions get the better of you is one of the greatest challenges that investors face. Use time as your ally and you will be rewarded… in time. Those who react to the latest headline eventually will be frustrated. As Warren Buffett has so famously observed, “investing is simple, but not easy.”

(1) $10,000 invested in the S&P 500 from January 1, 1980 to March 31, 2021. From Barron’s May 30, 2022, based on Fidelity Investments research.

(2) Value of $100 invested in the Nexus North American Equity Fund at inception on August 31, 1997, presented on a logarithmic scale. Returns used for calculation are before deduction of investment management fees and after custody fees and fund expenses. Past performance is not indicative of future results.

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