No Fear Of New Highs
A year ago, investors were terrified by a record drop in equities, which was triggered by an immune reaction of the stock markets to COVID-19. I got my rule book out of the drawer and published “A dozen rules for the bear market” in March 2020.
Today we are still in lockdown, but the reflected permanent shock cannot be sustained for so many months. It was not possible to follow my published rules for long, because share prices have now not only recovered, but are at record highs. Investors are looking for explanations: Do the markets no longer mirror the real economy?
Complex systems
The global economy is a complex system made up of a myriad of variables. When we hear negative economic news, we sometimes wonder about the positive development of stocks. However, it is not the news that drives stock prices. They are already discounted when they reach us. In fact, most of the time it is the prices that make the news, not the other way around.
Comparing the aggregate of the economy with the totality of the stock market and deriving recommendations for action from it makes little sense. There are winners and losers in all phases. That is why it is essential to look at individual business models. Only when you understand the most important points and can formulate strengths as well as weaknesses is the next investment step possible, namely embedding one's own knowledge in current events and thus weighing up scenarios for the future.
Missed out?
Many investors with a low equity allocation look back on a strong twelve months with new highs included and feel like they missed out. Inwardly, they distance themselves and think: I will wait for a more favorable opportunity to buy in. Is this declaration of intent realistic? If it were, why did they not buy last year when prices were actually lower and valuations more favorable?
The stock market is also a complex system consisting its myriad of variables. It is the sum of all the emotions of millions of market participants acting in many different time zones. What the stock market will do next week, next month or next year, nobody knows. Nevertheless, an opinion is always sought and usually offered.
Over 100 years of stock market activity
In 1896, the Dow Jones Industrial Index started at 40.94 points. In November 1972, it closed above 1,000 points for the first time and in 1999 above 10,000 points. Last year, it finally surpassed 30,000 points. I am tempted to make a prediction: in 20 years from now, the Dow Jones Industrial Index will be above 100,000 points.
How bold is this statement? It is about six percent bold. I could also have said 50,000. Then the statement would be three percent bold. These are the annual growth rates to arrive at the corresponding index levels.
Yet, whether in retrospect we hit three or six or some other percentage altogether, most investors will fall short. It is the nature of the stock market to reward only a few. It is not just costs and taxes that work against big stock gains, it is also primarily our fears and behavioral mistakes that make the biggest dents in our own returns.
The Dow's long history helps us understand that new highs are normal. We do not have to be afraid of them.
Finding your way
There is always something to do on the stock exchange. Somewhere there is always a business model that will be successful for many years, no matter what the economy does in total; somewhere there is a stock that is misjudged and whose price is too cheap and somewhere, unfortunately, there is a company that has reached the highest point of its performance development today. The daily noise about the economy and the stock market is usually more a distraction than profitable revelation.
For you as investor, it is more lucrative to search for good companies yourself and acquire them at a fair price or below. We are happy to support you in this by means of our Active Investment Advice, as well as in our discretionary mandates.
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