Factsheet Commentary : September 2020

No enterprise gains or loses value on a day-to-day basis but stock prices gyrate every day that the market is open. Over a suitably long time horizon, however, stock prices tend to move in line with the intrinsic value of their underlying businesses, punishing the profligate cash guzzlers and rewarding the well managed cash generation machines. 

Let us contrast the way that individuals approach investment in stocks versus investment in property. People who bought their houses in the 1980s for a few thousand pounds have seen their value increase ten-fold or more. When we buy a property, we are forced into a position of “buy and forget.” How many people would call their local estate agent for a valuation of their house on a daily basis? While that may appear to be a crazy notion, this is exactly how investors behave when they invest in the stock market. The same investor who is fine taking a long term view with property becomes a short term trader when it comes to stocks, checking prices on a daily or even hourly basis. When their shares are down 20%, they become rattled, sell out and promise to never invest again.

As humans, our brain focuses on the here and now, unless it is forced to do otherwise. Perhaps 90% of investors lose money in the stock market because they sell at the bottom and buy at the top. While following the herd may be mentally comforting in the short term, it can be disastrous for long term wealth accumulation. 

We must ask ourselves: why are we investing in the stock market and for how long? If the answer is anything but for long term wealth accumulation (with long term being at least 5 years), then one should not be investing in the stock market in the first place. By investing with a long term mindset, we position our sails to withstand short term volatility – and short term paper losses. By not demanding immediate returns, we give ourselves a chance to keep a cool head when others are losing theirs.

We have seen the 1987 crash, the emerging market crisis of 1998, the dot com bubble, the 9/11 atrocity, the global financial crisis and the sharp fall after Brexit – investors who stayed invested when the immediate outlook was bleak went on to enjoy the appreciation that followed. The same is likely to happen when COVID recedes – this time it will not be different. Hasn’t the fiscal and monetary response of governments and central banks rendered equities perhaps the only viable asset class for long term investors? Not something that we ever desired, but we are where we are.
The world became poorer when we recently lost Derek Mahon. He wrote many poems and, in these trying times, it would be appropriate to mention a few of his lines…The sun rises in spite of everything, and the far cities are beautiful and bright…

Everything is going to be alright. Undeniably, at this hour, we are under the cover of black clouds but, given time, everything will be alright.

Sterling Investments Management Ltd
Lynwood House 2-4 Crofton Road,
Orpington, England, BR6 8QE
info@sterlingim.co.uk

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