Caution: Low Flying Planes
A systematic approach can help investors keep their focus on the road ahead.
When out for a drive, it can be somewhat unnerving to see a sign saying “Caution: Low Flying Aircraft.” What are you supposed to do with that information?
Are you supposed to turn around? Pull over? If you keep driving are you risking a collision with an oncoming plane?
Fortunately, this sign does not signal impending doom; its purpose is to tell us not to panic. It is meant to prevent drivers from being startled by the sudden noise or vibrations caused by low flying planes. Armed with this information, drivers have less chance of being accidentally scared off the road.
Big macro events are like the planes that fly over that road: they come with the investment territory.
Investing could use its own version of this sign. Big macro events are like the planes that fly over that road: they come with the investment territory. Events like emerging market blow ups, Middle Eastern wars, rising interest rates, and currency shocks have been around since stocks traded on exchanges. They will probably always exist. Yet while major economic crises can have a large impact if they were to fully develop, they are often highly improbable.
This is not to suggest that pilots can’t make mistakes or that mechanical errors won’t occur. So this road sign is also meant to signal “be on guard.” If you’re in your car and a plane is in sight, wobbling and with smoke behind it, it would likely be wise to slow down or stop the car.
At this point, we have one eye on the road and one to the sky. While China and emerging markets are on our radar screen, there does not yet appear to be enough smoke in the sky to stop the car (although we are being careful about our positioning on the road). But a lot of the risks we are seeing now are likely just planes on a normal approach: noisy, a bit scary, but not something that requires evasive maneuvers. In situations like these, investors are best advised to stay calm and keep driving.
Following a systematic and common sense investment approach can help. At Mawer, our approach is to invest in “boring” wealth creating companies, run by excellent management teams, which can be purchased at an attractive price. This process helps us put the investing odds in our favour by focusing on the things that we can control vs. those we can’t.
We know that planes will continue to fly overhead. By following a disciplined and time-tested investment approach, we can put our focus on the road ahead rather than anxiously looking toward the sky. It may be boring, but it works.