Beyond the Financial Press - Dark Days Lead to Clearer Skies

The period between the fall of the Roman Empire and the start of the Renaissance (600 - 1450 A.D.) is often referred to as the Dark Ages. What is forgotten is the ending of the Classical Era and the period leading up to the Dark Ages. This was a time marked by purposeful suppression of thinking and beliefs. The writings of the great Roman and Greek philosophers like Socrates and Plato were censored. Socrates preferred to die rather than live in a world where his teachings were overwritten or restrained, and his beliefs punished. He was put on trial by a court of elders, for the crime of worshipping strange gods and the corruption of youth. But his real crime was to openly speculate about the nature of the cosmos, i.e., to question science!

Censorship was looked upon as "honorable" because it helped shape the moral character of its people. But as we well know, suppressing information and shutting down free speech isn’t easy to sustain. In the end, truth eventually finds its way.

The catalyst attributed to unleashing the Renaissance and eventually the Modern Age of Information was Johannes Gutenberg’s invention of the printing press in 1440. The printing press enabled the distribution of information on a scale never seen before. The printing of the bible, the writings of history, and the edicts of philosophy united continents and cultures, setting the stage for a new world of exploration.

Many years later, we are again looking for light in the face of many challenges. Consumer confidence, business confidence, and investor sentiment metrics are at post-WWII lows. This is quite incredible, given it captures the Great Financial Crisis, 1980s, and the dot-com bust. In aggregate, investors and businesspeople are saying this period is comparatively worse, and essentially questioning if we are going to be okay.

If you don’t believe the world is ending, you understand that difficult times give way to opportunity. Just two years ago, if you sold during the pandemic lows, you missed one of the greatest recoveries in market and economic history.

Missing out on even just a few good stock market days is expensive. A JP Morgan study¹ looked at the 20-year period between Jan. 3, 2000, and Dec. 31, 2019. It found that the S&P 500 earned an average annualized return of 6.06%. During that 20-year period, if you missed out on just the best 10 days, your return shrank to 2.44%.

In other words, missing just 10 days resulted in a ~3.5% annualized deficit versus the market return. Compounded over 20 years, that difference equates to 104%: effectively the difference between doubling value and not!

Further, missing the best 30 days puts you in negative territory, earning a -1.95% return. And missing the best 60 days resulted in an annualized loss of 7.02%.

The point? Unless you know exactly when those 10, 30, or 60 best days will occur (and please let us know if you or someone you know does!), market timing is a losing game.

The world finds ways to persevere and move beyond today’s challenges. If you invest only when times are good, you are usually investing at high prices and likely to fall victim of selling at inopportune times. Potentially missing the biggest days that impact long-term returns. Keep in mind, the real destruction to be avoided is the permanent impairment of your portfolio.

I have learned not to bet against optimism. When starting my business in 1994, it was a dark time. Record oil prices, a war in Asia and rising interest rates. Sound familiar? Certainly a challenging period for a young business in search of capital. But I was full of hope. The war ended, we avoided recession, and then came the internet revolution; ultimately leading to the technology boom of the last 20 years. Few, if any, rational market prognosticators saw this as the likely outcome then. On second thought, perhaps the optimists did.

Today, the economy is open. Technology continues to be a disinflationary and productivity enhancing force. Many jobs are available, and employers are looking to hire (including us). Right now, practically every investment asset is on sale versus prior prices. Remember the market moves in cycles. Market pullbacks of 10-15% are not unusual in normal market cycles, especially following strong runs like the past two years. Keep a steady hand.

Centuries ago, civilization emerged from the Dark Ages into an age of ideas, discovery, and innovation. But even Gutenberg could never have envisioned a world where information is delivered instantaneously - and digitally. Faith in your process accompanied by good decision-making during dark times make us better savers and investors for when the brighter days arrive.

Thanks for reading.
Dave

Source

¹JP Morgan Asset Management. "Guide to Retirement", 2022.