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Beating Uncertainty with Long-Term Investing and High-Quality Companies


About a year ago, Jamie Dimon did an interview on “60 Minutes,” in which the interviewer asked Dimon about the unpredictability in the economy right now and whether it was more so than usual. Dimon’s response was, “No. If you look at history, if you take a newspaper and open it at any month of any year, you’d have the same list of hugely unpredictable things.”

Looking at History

Since then, we have had a world-changing pandemic and an economic crisis. Even considering these circumstances, I would still agree with Jamie Dimon that there is always uncertainty. Looking at old newspapers is incredibly helpful in gaining insight into what people were thinking at that moment. What I found was that they were consumed with the same uncertainty we are feeling today. Mark Twain famously said that while history doesn’t repeat itself, it does rhyme. A while ago, I discovered that the New York Times website has a feature called Time Machine. This service allows you to look back at 150 years of their newspaper. It is incredible to see their first newspaper from September 18, 1851; reading the articles is like stepping back in time and seeing history through their eyes. Newspapers provide a perspective that history books cannot: how people felt at that moment in time. You can look at several articles during a recession or an event that significantly affected the economy and see how people reacted before and after.

time machine

Timing is a Fools Game

Attempting to predict a recession is a challenging feat, as it is nearly impossible to anticipate with accuracy. Unfortunately, this does not stop individuals from trying to time the market, which can result in significant losses. The reality is that things are much more complicated than we think, and the market can stay irrational for more extended periods than we anticipate.

In my opinion, the stock market's constant action is not always helpful for investors because it is not a perfect reflection of the underlying economy. Human emotions involved in the stock market can drive peaks and valleys, whereas the actual economic reality is likely much smoother. I recently read a book about Jim Simons, the founder of Renaissance Technologies, a famous quantitative hedge fund manager who questioned whether to pull money out of the market during the correction in late 2018. Even a man who conquered the market for over 30 years can struggle to keep his emotions from clouding his judgment, which shows how challenging it is to navigate the stock market.

The Risk Is Not Volatility - It’s You

The true risk in dealing with volatility lies in one's approach towards it, rather than the volatility itself. In the stock market, predicting short-term outcomes can be an arduous task due to the complex system with numerous variables. Benjamin Graham's wise words highlight the difference between short-term and long-term market behavior, where the market acts as a voting machine in the former and a weighing machine in the latter.

Compared to private companies and real estate, investments in the stock market tend to be more volatile due to real-time pricing and the ease of buying and selling. While having options can be advantageous, it can also lead to complexity in investment decisions. The constant flow of real-time pricing from the stock market can evoke emotions that can be detrimental to an investor's success. It is common for investors to sell at low prices and buy at high prices when emotions take over.

While Warren Buffet's famous quote, "Buy when there's blood in the streets, even if the blood is your own," may be inspiring, putting it into action can be challenging. However, several solutions can help mitigate the issue of emotional investing.

  1. Have a long-term perspective.
  2. Invest in high-quality companies.
  3. Avoid debt.

Compounding is the Key

The primary objective of investing is to let your investments compound over an extended period, which is key to creating wealth. It is essential to acknowledge that the economy has experienced rough patches throughout history, and during these times, it is crucial to remain invested to reap the benefits of compounding. Good returns over a long period, rather than outstanding returns, are vital to achieving this goal.

Morgan Housel offers an insightful example in his recent book, "The Psychology of Money," where he compares the investment strategies of Jim Simons and Warren Buffett. Simons generated an impressive 66% returns over the past 30 years, while Buffett had approximately 20% returns over 50 years. However, despite seemingly inferior returns, Buffett's net worth is two to three times greater than that of Simons. The reason behind this is compounding, which takes time to show its full effect. Buffett had a 20-year head start, and this allowed his investments to compound over a more extended period, resulting in a higher net worth.

America’s Tailwind

In the short term, uncertainty is a constant, but there is one thing that remains certain: America has remarkable tailwinds that have been powering its economy. In his 2019 annual letter, Warren Buffett highlighted the US tailwinds and explained why he remains bullish on the US economy. I agree with his analysis.

To put this claim into perspective, let's look at some numbers. If someone had invested 1,000 in a no-fee S&P 500 index fund at the time of my birth in 1980 and reinvested all dividends, their stake would have grown to be worth 74,378 (pre-taxes) on August 31, 2020. However, if they had sold their investment out of nervousness during the Great Recession and subsequent recovery in 2011, their investment would have only been worth $21,639, a difference of 240%. This highlights the power of compounding, which can significantly impact investment returns over the long term.