This week we get all philosophical, as we explore the financial world’s equivalent of “if a tree falls in a forest, and no one’s there to hear it, did it make a sound?”
Because the week’s stock market performance numbers look fairly silent: UK equities, for example, squeaked out a return of just 0.15%. But this hides a couple of noisy days, particularly Monday, which felt like one of those “here we go again!” moments, as many major markets plunged by over 2% in a single session: A big move outside of an obvious crisis.
This had the financial world bracing itself for worse to come, with the spread of the delta variant commonly singled out as the harbinger of another prolonged collapse in share prices. Then on Tuesday everything bounced back. And it’s been quiet since. So that, it appears, is that.
So, here’s the question: If a sell-off happens, but no one has time to sell, did it actually happen?
First a quick nod to pedants’ corner: Yes – obviously somebody was around to sell something, or prices couldn’t drop. But ignore that and go with me on this one – there’s a useful principle here. Which is that successful investors know that scale matters. Specifically, in this case, timescale.
In this note, I happen to be talking about a week. If that’s the timescale by which you judge your investments, then there was nothing to see over this seven-day period: it ended as it started. But if your time horizon is a day, then you’ve been through the emotional wringer. And emotions can be dangerous when investing, particularly the extremes of fear and greed: So on Monday’s drop, as the headlines turned bleak (as they always do on a red day), you might have been tempted to sell out in fear of a further drop. But, if you had, you missed Tuesday’s bounce, and locked in a nasty loss.
Now we can take this to extremes: We could shrink our time horizon down to microseconds, which some do, trading the millions of tiny moves that happen every day (if you think this is a fanciful exercise, I’d recommend a read of Michael Lewis’ “Flash Boys”, about how “high-frequency traders” rigged the US stock market).
But for that, we’d need a ridiculously powerful computer, a house inside the stock exchange, and no scruples. More relevant, then, is to consider lengthening our timescale. How long? A year? Maybe: In 2020 global equities made 12.3%. Nice. But during that year they collapsed by 26%, at which point many panic sold. They then rallied back by an astounding 63%. Those panic sellers definitely rue paying close attention: it wasn’t a problem for those who only check in every New Year’s Day.
But is a year enough? Go longer – to a decade, or several decades, or even a lifetime – and you’ll find supernaturally calm types like Warren Buffet. He is, I’m told, worth a bob or two, so maybe there’s something to be said for stretching those time horizons out a bit?
Food for thought. But, in the meantime, have a great weekend,
Simon Evan-Cook
(On Behalf of Raymond James, Barbican)
With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.