Golden Bears And Epic Bubbles
Jack Nicklaus holes a crucial putt on the 71st hole en route to his final major, The Masters in 1986 (PHIL SANDLIN, AP)
Golf fans are incredibly lucky that Jack Nicklaus, 81 this month, is still with us. “The Golden Bear” won golf’s prized ‘major’ tournaments a record 18 times; he was runner-up a further 19 times. Nicklaus adapted to and won despite enormous changes to the game and society around him – increased competition from around the world, younger and physically stronger players and advances in technology. And since Nicklaus retired, his insights and commentary are always insightful and kind.
Jack came to mind when I heard another famous 81-year-old bear, Jeremy Grantham, founder and CIO of GMO, issue a startling warning: US equities are in the late stage of an “epic bubble”:
“I believe this event will be recorded as one of the great bubbles of financial history, right along with the South Sea bubble, [The Wall Street Crash of] 1929, and [The Dotcom Boom and Bust of] 2000.”
Wow. Grantham, like Nicklaus, has succeeded throughout decades of tumultuous change. And he also offers wisdom laced with kindness to those still finding their way in our industry in his article “Waiting For The Last Dance”, which I encourage you to read in full.
So when he makes such a stark statement, it is worth paying attention.
Waiting For The Crash
If you know that we are in the bubble of a century you should liquidate, wait for the crash and buy back in after it’s happened, right? As Grantham says, “sooner or later there will come a time when an investor is pleased to have been out of the market.”
I agree – but this period is likely to be brief and far outweighed by the time an investor is glad to have stayed in the market. Even if you correctly identify a bubble, in Grantham’s own words, “timing the bursting of bubbles has a long history of disappointment”.
And worst of all, let’s say you were right and you got out at the “right time”: now what? The fiendish challenge of getting back in is the number one reason market timing is a bad idea.
I inherited a client in 2010 who had the good fortune, or so she felt, to have sensed danger in 2008 and moved largely to cash. For the five years I looked after her, our discussions followed the same pattern.
Our investment managers would provide a market update, which most of the time would show a recovery, in fits and starts, from the March 2009 low. The client’s response would be the same: to say that it was too early to tell whether any progress was merely a blip before a bigger fall; she wanted to see further evidence of the recovery before she could believe in it.
Calling the market top is the most intellectually seductive exercise in finance – yet most of the time it turns out to be wrong. In this case, my client became so attached to her perfect analysis and correct forecast of one rare event that she was paralysed for years from reinvesting. In doing so, she stacked the odds against herself, since the years of gains outweigh the years of losses, on average, just as they did again in the 2010s.
Not for the first time, I hear acquaintances talk of an inevitable, looming crash, about how “it’s the Fed” keeping the show on the road and how the smart money is in cash waiting to take advantage once the house of cards collapses. It’s amazing how one can always make a strong case for why the markets are on the brink of disaster – and how often it’s wrong.
Take February 2020: imagine you fly back from China where lockdowns have already begun, you can see what’s about to hit the rest of the world, and you sell everything ahead of the catastrophic crisis about to hit. So now you are in cash. You watch as the disaster you correctly predicted not only unfolds but gets worse day by day. You were right in your forecast. By the end of March 2020 we are staring into the abyss.
What are the chances, as what you predicted actually happens, that you decide at that point to get back into the markets? It is unlikely, I suggest, that you would feel confident doing so for some while – perhaps you would still be on the sidelines, like my client, with your perfect analysis keeping you out of one of the fastest, biggest rallies of all time.
Shifting The Odds in Your Favour
What do we recommend?
Certainly not trying to identify and time the bursting of bubbles. Like all market timing strategies, this is very likely to be costly and unsuccessful. In fact, what you want is a strategy and plan in place that means you are never in the position of being forced to make decisions as events unfold. The journey to your long-term financial goals should not require you to make calls about bubbles or central bank intervention.
Our advice instead is to remove complexity and to focus on what really matters to you as an individual rather than what is happening in financial markets at any given point in time.
Invest in such a manner that your portfolio is likely to fluctuate in value no more than you can stomach (no sleepless nights). As far as possible invest in assets that draw returns from sources different to your other wealth or main business interests. Diversify by as many factors as you can, reasonably and cheaply. Resist the urge to tinker. Ignore headlines. Stay invested and let the long-term odds work for you, not against you.