Calluses
Bear with me on this one.
A drawn-out bear market is needed because investing has been too easy for too long, and new investors who haven’t experienced a twelve-month peak-to-trough drop need calluses.
I am baffled by market commentators suggesting the month of March has been brutal for investors. Friday’s Globe and Mail reported that “from Shanghai to New York, traders, investors, wealth managers and bankers are grappling with sleepless nights, working weekends, long client meetings, quick portfolio churns and last-minute nervousness in executing deals.”
I’m leaving the churning bit alone. Readers can draw their own conclusions.
I’m writing this on the afternoon of March 27th. Year-to-date, the Canadian market is up about half a percent, the U.S. market is down five and a half percent, and international markets are down just over one percent.
And professional wealth managers are losing sleep because of that kind of performance?
How will they react the next time markets are down ten, twenty, thirty, forty, or even fifty (I hope not) percent? Are today’s investors – especially the professionals – so untested that a five and a half percent year-to-date drop warrants sleepless nights?
It wasn’t even a year ago that the S&P 500 dropped about 20% in six weeks. Remember that? It was because of the tariffs announced on Liberation Day. Then, on April 9th, the S&P500 shot up almost 10% because of a temporary pause to those same tariffs. How quickly we forget. And that’s the problem. Investors don’t get enough time to develop calluses when the market hurts them.
“Market dropped? I’ll just buy the dip. It’ll recover fast. Just like it did after Christmas in 2018, March of 2020, the end of 2022, and the pause to tariffs last year.”
It’s not always going to be that easy. Millennials and Gen Zs need their 1973-1974 bear market, or their Tech Bust, or their Great Financial Crisis. They need to earn the risk premium. And they haven’t yet. The S&P 500 has compounded at close to sixteen percent a year for the last seventeen years. Sixteen percent. That means $10,000 invested in the S&P 500 seventeen years ago is now worth almost $125,000. Some Millennials and plenty of Gen Zs are even allocating their life savings to more volatile investments like the Nasdaq and cryptocurrencies. They think that growth rate is normal when it isn’t.
I can’t believe I’m quoting a Batman movie (2005’s Batman Begins to be exact – a hell of a movie that came out the summer I graduated from high school), but “when a forest grows too wild a purging fire is inevitable and natural.” The S&P 500’s long-term average return is about ten percent a year. Ten percent. Its seventeen-year average return is about sixteen percent. It will return to its long-term average. And it can do so in two ways:
It can crash and recover slowly, or it can grow slowly for several years. History suggests it’ll be the former. A purging fire is inevitable.
It’ll come. I don’t know when. But it’ll come. And when it does, it’ll be the same as ever.*
Some investors will give up, and after incurring rough losses, will sell at a terrible time. They’ll then swear off investment markets, sticking to GICs forever.
Other investors will buy the dip, and buy the next dip, and the next, and the next again until they have nothing left to buy with. They’ll make changes near the bottom, thinking they can sell low priced investments and buy even lower priced ones. They’ll be active, hoping the activity will somehow turn the market around. Of those investors most will capitulate and become GIC investors. Others will make a killing in the recovery. And others will make plenty of bad decisions that will eventually be forgiven by the next bull market.
And then there will be the callused investors. The ones who carried on. The ones who endured. The ones who went through hell. They’ll be the ones who did nothing and were successful as a result. Those are the investors we want to work with. The callused ones.
*With thanks to the title of one of Morgan Housel’s books.