Reading ‘Reminiscences of a Stock Operator’ by Edwin Lefevre is almost like a rite of passage on the path to a career in investing.
I have read it a few times now and occasionally get drawn back to it. It is a fictional story which is based on the life of one of the great traders of the early 1900s, Jesse Livermore. The stories around Livermore’s exploits are tantalising, exciting, daring, tragic and frightening.
I would go as far as to say that he was a romantic character, ascending to great heights when he became one of the richest people in the world, before ultimately taking his own life having reportedly lost his great fortune.
Livermore operated during a very different period in stock market history and I would certainly not suggest his writings are where a young, aspiring investor should start their investment education.
Tales of daring short selling raids and ‘cornering’ markets are not solid foundational knowledge for investors seeking to protect and grow their clients’ capital over the long term. Although some recent speculative stock market behaviour is better understood having read Livermore’s story. Spectacular short covering rallies are not new.
Aspiring investors would be much better off reading the work of Warren Buffett or Philip Fisher, than trying to emulate Livermore.
However, Lefevre’s book does contain some timeless wisdom. In particular, one story comes to mind today. It is the story of a successful, older investor called Mr. Partridge, nicknamed Old Turkey, who was known for his patience. When asked for his advice on the market or a stock, he would often simply answer, ‘you know, it’s a bull market’.
In the book another character, called Elmer, cautions Old Turkey that a correction is coming and that he should sell so he can buy back later. Old Turkey responds, ‘Why, this is a bull market! …If I sold that stock now, I’d lose my position; and then where would I be?’
Old Turkey further explains that ‘when you are as old as I am and you have been through as many booms and panics as I have, you’ll know that to lose your position is something that nobody can afford, not even John D. Rockefeller’.
In recent months I have found myself quoting Old Turkey more and more. We are in a bull market. There are lots of things to be concerned about today, and there will be a correction at some time, but can you afford to lose your position in a bull market?
This might seem a little flippant or trite but there is wisdom in simply recognising the environment we are in rather than trying to fight it.
There is no doubt that there are signs of speculation at the moment in certain sectors and the contrarian in us is concerned by this. However, when we stand back, we continue to see reasonable equity market valuations, a recovering economy and very supportive policy. It is a bull market.
To be clear, we would prefer a correction right now. A 5-10% correction would likely cool sentiment and lay the foundation for a more sustainable rate of appreciation. However, you don’t always get what you want, and we are certainly not of the view that we could time such a correction.
Furthermore, as much as we would like a correction, we also see the potential for the market to continue climbing higher without correcting. There is a lot of capital in the world that needs / wants a return above inflation and, with inflation expectations moving higher, there is the potential for a big asset allocation shift out of bonds and cash into equities. Indeed, it is starting to ‘feel’ like this may be happening.
This brings me to another point; what is the point of selling? Of course, we should build up cash for near term requirements and we generally advise that equity investors should have at least a five-year time horizon.
On the assumption that investors have long time horizons, then the act of selling can only be reconciled with a wish to reduce portfolio volatility or an attempt to time the market and buy back cheaper.
The former is perfectly valid and perhaps the volatility of 2020 was a reminder of how uncomfortable equity markets can be. It, therefore, makes perfect sense to challenge your risk appetite and asset allocation now, after a very strong recovery, and perhaps make changes to your long-term approach.
However, it is the timing point we struggle with. From today’s starting point equity investors should expect mid-single digit ‘excess’ returns from equities versus bonds over the long term. Furthermore, the longer an investor’s time horizon, the higher the probability of earning these returns. Such that the truly long-term investor should be confident about earning reasonable returns from equities from today’s starting point.
For a long-term investor, the act of selling suggests they believe they can enhance their expected return by selling now and buying back later. We would all love to do this, but can we?
What will drive the market lower? A recession perhaps? This seems unlikely given we are just emerging from one. Central bank tightening to slow the economy then? Well, central banks have pretty much said they are going to let the economy run hot for a period. An unforeseen event? Quite possibly, but then again it is unforeseen. Valuation? Overall market valuations look fine to us today.
Perhaps investors will just get lucky. This is possible, of course. However, our experience tells us that big timing decisions are incredibly difficult, and investors are likely to get them wrong.
This is not to say investors should not accumulate cash or make minor changes, but long-term investors will almost certainly be best served sticking to their long-term plan.
It is a bull market, you know. As always, we are delighted to chat and discuss our views further with you.
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