Every year, investors play scare tactics with worries about the dangers in the markets. Yet, with a combination of reasonable investment horizon and management discipline, they can usually put their minds at ease and forget about short-term predictions.
Every January, it is customary to try to predict the future by asking what the New Year will bring. Of course, very often, these predictions turn out to be wrong and have to be revised considerably afterwards. The best example of this tendency is that of the journalist James Glassman who published his book “Dow 36’000” (when it was below 12’000 at the time of publication) just before the bursting of the internet bubble and the bear market of 2001-2002 and who thus, like many others, largely served as a contrary indicator. Admittedly, this year is one for the anxious to be nervous, as it opens with particularly high valuations in a very uncertain economic context given the virus situation and inflationary pressures. Government debt is at an all-time high, the geopolitical situation is tense around the world and the consensus is for several rate hikes in the coming months to counteract rising prices caused by supply chain tensions. With many commentators talking about an exceptionally volatile situation, it seems perfectly legitimate to look for a compass to guide us for the next 12 months.
Every year is uncertain
In this regard, it is important to remember that every January brings its share of uncertainty. A quick review of past financial commentaries clearly shows that investor concerns always seemed insurmountable at the beginning of the year. This is clearly seen in the research of a Wall Street veteran – Jim Cullen of Schafer Cullen – who reminds the savvy investor of the persistence of these existential questions about the direction of the markets. Whether it was political tensions that suggested the end of the world was near, or other unprecedented macroeconomic signals that should have prompted caution, the regularity of these doomsday comments remains one of the most stable constants in our January financial environment.
The myth of the new paradigm
To paraphrase Jim Cullen, it is also useful to remember that in all long bull cycles such as the one we are currently experiencing, investors convince themselves that there is a good reason for the market to keep going up, such as technological innovations that would challenge the usual valuation criteria. The market thus falls in love with so-called “future companies”, whether it is stocks like RCA, AT&T or Ford in the pre-war period, IBM, Kodak or Polaroid in the 60s and 70s, or internet stocks in the NASDAQ bubble of the 90s. In each of these cases, commentators evoked a “new paradigm” and structural changes that justified ignoring any discipline in the selection of stocks exposed to these new technologies. And in each case, alas, the end of the story was very painful for investors who had given up paying attention to the underlying valuations of these “hot” stocks. This is an important lesson for investors who still rush to the trendy companies promoted in applications such as Robinhood or who follow the omens of the Pythia Cathy Wood (and let’s not even talk about Bitcoin…).
Time erases short-term movements
These financial neuroses are all the more surprising because, over time, the performance of stocks has been simply phenomenal. Of course, there have been corrections, reversals and impressive crashes. And yes, hot stocks haven’t risen to the sky. But, over periods of 5 to 10 years, investors who were patient and, above all, those who remained focused on the valuation of the stocks they had in their portfolios, obtained absolutely remarkable performances over the past 85 years. It is therefore important to look for the recipe for financial health elsewhere than in short-term forecasts. Because the reality is that patience and investment discipline have been far better advisors than reading the stock market forecasts at the beginning of the year. And this is where the old adage of Benjamin Graham, the father of “Value Investing”, certainly still applies: “If investors in the stock market invest with a discipline and if they invested for the long term, they could forget everything else”. Indeed, studies show the success of this proven method: focus on quality companies at reasonable valuation levels and forget about short-term market fluctuations. This strategy is all the more valid as stock market performances are often out of sync with the major macro-economic aggregates and that economic forecasts are therefore of little help in building an investment strategy.
Invest rather than speculate
However, these simple lessons are the guarantee of long-term success and they have allowed investors who follow them to make their savings grow spectacularly. And if, apart from day-traders and other speculators, they apply regardless of the nature of the investors, they are perfectly adapted to the two major activities of our financial center: private banking and institutional asset management. Indeed, whether we are talking about an individual or a family, who generally look ahead several generations, or a pension fund, which invests over several decades for the purpose of providing retirement income, we look far ahead rather than at the end of our feet. But above all, they take us away from the often misleading anxiety-inducing context and allow us to avoid making forecasts that we already know will be obsolete by the end of January.
 Jim Cullen, Schafer Cullen Capital Management, “Year-End Outlook – Anybody Worried?”, December 2021.