'What is going to happen' vs 'what has always happened'.

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch

What is going to happen? We are often asked to comment on “what is happening now?” or “What is going to happen? (in the near future)” with respect to the likely returns of the ASX 200 and MSCI indices.  What the questioner is really trying to say (the implicit question) when asking these questions is:

1. “Do you think that the ASX 200 and MSCI indices are going to crash anytime soon?”; and
2. “By how much and on what date will the ASX 200 and MSCI indices crash?”

We usually respond by saying words to the effect that “no one knows what is going to happen in the near future”.  What we are going to say in response to this line of questioning from now on is that, “it doesn’t matter what is happening now/going to happen in the near future…. What has always happened is the only thing that matters.”  Whilst this statement shouldn’t be taken as much literally as it should be conceptually, it is sound.  The well regarded American fund manager Peter Lynch has a famous quote stating that “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

In medical analogy terms, this is akin to the dilemma that a hypochondriac faces – they worry so much about physical illnesses that they don’t have that they end up getting sick from the stress of it all!

What has always happened?  Australia and the world’s largest companies have, over time, outpaced inflation by approximately 2 ½ – 3 ½  times.   That is, if inflation were to average 3% pa. over an extended period of time (20 years or more), the average return of Australia and the world’s great companies would generally be between 7.5% – 10.5% pa.  This average return is achieved despite numerous times throughout these periods where the temporary value of these great companies has declined by 1/3  – ½ .  The most recent significant decline being the Global Financial Crisis of 2008-09 where the great companies of the world declined by circa -57% before beginning to recover.

Since May of 1946 to Dec 2017 there have been 14 times whereby America’s largest 500 companies have declined by between a min. of -19.3% and a max. of -57%.  Despite these temporary declines, the advances have been permanent.  Ignoring dividends paid, the price of these companies have advanced from 19.3 points in 1946 to 2,664 points reached in Dec 2017 (think of this as the average share prices of these companies increasing from $19.3 to $2,664 per share).

There has been no evidence to suggest that any one human being, anywhere on earth, and at any point prior to any one of these 14 declines of 19.3% or more had been able to predict when the next decline would begin and end (eg. What is going to happen?).

Therefore, I would ask you not to be as concerned with what is going to happen, but be more concerned with what has always happened.   

In summary:

• ‘What has always happened’ is far more predictable than ‘What is going to happen?’.
• Markets go up, markets go down. Markets go up more than markets go down. Ala $19.3 becomes $2,664.30.
• Basing investment philosophy on ‘What has always happened’ has always worked for the patient, disciplined, and long-term focused investor.
• Basing ‘investment philosophy on ‘What is going to happen?’ has rarely, if ever, worked for the impatient, ill disciplined, and short-term focused speculator.

​Written by Michael Hogue.