Adding real value…

I don’t know how the current problems are going to pan out, but I do have rational optimism that this will pass, as it always has.

I remember writing to clients in March 2020, just as the world was beginning to shut down and markets were crashing.

I was writing to offer comfort that stock markets weren’t going to zero and that having patience and focusing on their health were the remedies of that period.

Fast-forward two and a half years and, while Covid looks to be behind us, the world is still in a scary place. Markets recovered, soared, and then dropped off again, so we find ourselves in another difficult spot.

The news on TV, in the papers and on social media is at peak pessimism right now, with former prime minister Liz Truss and former chancellor Kwasi Kwarteng having played havoc with UK gilts and mortgage rates; inflation sitting at 40-year highs, causing a cost-of-living crisis that is very real; a war in Ukraine; and interest rates going up for the first time in 15 years.

There are so many things to be concerned about and lots of headwinds for the world to resolve.

I’m not going to sugar-coat anything to clients. But it’s interesting that the markets aren’t down more.

However, in investing terms it seems to me that right now is potentially the time to be bullish. The Warren Buffet quote — ‘Be fearful when others are greedy and be greedy when others are fearful’ — seems apt.

Is this the darkness before the dawn…? Yes. Everything looks scary and green shoots seem few and far between, but this feels like the time we can add real value to our client families for the long term.

Over the past 50 years, there have been seven recessions, 10 bear markets and four sizeable market crashes. All of those, I’m sure, felt scary and disastrous in their own way. All of them had clients questioning beliefs, testing their patience in the stock markets and wondering whether they had the fortitude to stick to the long-term plan we had talked about.

It is difficult to be a good long-term investor. Really difficult.

This is part of investing, though. There are no free lunches and to get the long-term returns of global growth you need to withstand the periods of global decline or turbulence.

Every recession is different, but they have all ended and the world has moved forward to new highs, bringing new technologies and businesses that have provided the engine for growth.

The best option right now for the clients we work with is to automate monthly savings in stock markets. When prices fall, long-term return expectations rise. When bond prices go down, the yield goes up, so people are finally starting to see 3% on savings rates (if tied up) and decent yields on investment-grade bonds. And the price-to-earnings ratio of stocks has come down from the late 20s to mid-teens, which is below the long-term average.

I don’t know how much further (if at all) stocks are going to fall. I don’t know how long this recession or persistent inflation will last. I don’t have all the answers. No one does.

As recently as 2020 the Federal Reserve made the prediction that US jobs would get down to four million available by 2023, and that the fed funds rate would be raised by 0.6% in the same period. By mid-2021, job openings had already reached four million, and they raised the fed funds rate by 2.5% in 2022.

The point I’m making is that the Fed, full of top-level economists and PhDs, was miles off its own forecasts and on interest rates that it set itself!

If the Fed is nowhere near, listening to the average newscaster is not going to be of much use. Forecasting is a fool’s errand, and believing what you see on TV, in the papers or online even more so.

While I don’t know how the current problems in the UK are going to pan out, I do have rational optimism that this will pass, as it always has.

Innovators will solve problems to save the world from climate change, cancer will be cured, medicines and biometric tests will arrive to cure and eradicate other diseases. Citizens will continue to be better educated and have more clean water, electricity and Wi-Fi than ever, and humans will thrive for many years to come.

I recommend Hans Rosling’s book, entitled Factfulness: Ten Reasons We’re Wrong About The World – And Why Things Are Better Than You Think, for anyone who’d like some data-driven positivity.

I like to believe that most people are well intentioned and want to leave the world a better place. That is where my rational optimism comes from. It’s also a far happier experience than being an eternal pessimist. Even a broken clock is right twice a day.