Tides not waves
Focus on long-term themes not short-term noise.
The next time you find yourself on the beach, try to spot the high-water mark. Besides conveying important safety information, this valuable input allows developers to understand how closely they can build structures near the water. This line is not driven by the individual waves crashing in, but by the tide.
Tides, not waves. And as Charles Dow wrote in 1901, “this method holds good in watching and determining the flood tide of the stock market.”
The day to day events that dominate investment news are like waves crashing onto the beach; unique, absorbing…and ultimately inconsequential. Most investors would be better off focusing their attention on understanding the longer-term drivers—the investment tides—than trying to predict the impact of events that will hardly matter in ten years. This is because knowledge of the tides can help investors better understand the true nature of the risks in their portfolios and the companies in which they invest.
When it comes to investment tides, it pays to remember that they can carry momentum for far longer than we may anticipate.
Many investors were caught off guard in 2015 by the impact of investment tides simply playing themselves out. China slowed as it struggled to contend with the consequences of significant overcapacity in a number of its key industries. Commodity markets weakened globally as persistent technology-fueled supply gluts kept prices low. In both cases, these events and their consequences were far less shocking to an investor who understood the respective underlying investment themes.
When it comes to investment tides, it pays to remember that they can carry momentum for far longer than we may anticipate. When underlying fundamentals shift because of a big, long-term trend, the move is often more significant than initial predictions anticipated.
For example, at the end of 2014 many failed to appreciate the possibility that structural changes were driving the decline in crude oil prices. Some investors made the mistake of doubling-down on a beleaguered energy sector…which subsequently fell much further. Had these investors seen the likelihood of the decline being a result of a tide, they might not have reached for the falling knife.
Prudent investors are focused on tides, not waves. They seek to understand the long-term themes so that they can better identify the companies that should be wealth-creating over the long-run. This understanding allows them to build resilient portfolios that can withstand the tides.