Patience and intelligence
04 June, 2015
A handful of patience is worth more than a bushel of brains
- Dutch proverb
I had to pull out one of my favourite Warren Buffett quotes last month; the one about investing on the assumption the market would be closed for five years. It is closely aligned to another favourite - "if you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."
These oldies but goodies can be really helpful in times of uncertainty and market noise. And noise there is. Over many months now we have mentioned the growing chorus of pundits proclaiming the end of markets as we know them. If you followed financial media closely and believed everything you read, you'd believe that all assets are overvalued, share markets are being propped up by artificially low interest rates and once interest rates start their imminent rise, well, goodness only knows what lies ahead. Thankfully our team members don't believe everything they read but some of the well-reasoned arguments, based on what has happened in markets before, can be persuasive. If you start to believe that everything is overvalued and that a correction lies ahead, it is easy to hesitate and put off buying or holding what might otherwise be an ideal investment. Hence my reference to Buffett's strategy of buying quality assets and buying them for the long-term.
We are into the sixth month of the year and despite all the chatter, markets haven't really done a lot. Given the strong performances of share markets in recent years, they were probably due a breather, and they are having one. Well, except for the Chinese share markets which are a law unto themselves (see Roger's summary China shenanigans). This year was supposed to be all about interest rates - a change in the bond cycle which would bring volatility and uncertainty. In January, it was easy to believe that 2015 was indeed going to be about bonds - in a matter of weeks, 10-year US Treasury bond yields fell 0.53% (from 2.17% to 1.64%), UK 10-year rates fell 0.42%, German yields fell 0.27% and even Japanese bond yields fell slightly. This prompted the New York Times to talk of "flashing warning signs" and many an investor sat on the edge of their seat wondering what havoc would ensue once interest rates started moving in earnest.
Yet here we are in June and nothing much has happened. In fact by historical standards, 2015's interest rate movements have been below average. Without a clear steer from interest rates, share market movements have also been relatively tame. We haven't had any significant corrections and we haven't had any major rallies either. What we have instead is a market poised for what might come next and the expectation is that what comes next will more likely be negative than positive. Shares may prove to be overvalued so we won't buy them, bonds may prove overvalued so we won't buy them either and property is very likely overvalued so we won't go there. Instead, we'll fixate on every bit of news, just in case it's the big one.
Every investor can benefit from a long-term perspective. Whatever happens in markets next shouldn't have a significant or lasting impact on the value of a quality asset. Over time, the value of a business changes only slowly; certainly less than its daily market price would suggest. If you choose well, you shouldn't have to worry about what the next month or year holds. As Buffett suggests, if you find a company with bright prospects that has a sustainable competitive advantage and a track record of success over a reasonable period, then you can relax knowing that its value will likely remain intact for some time. No need to fret the unknown, punt on interest rates or predict the market's direction. Apply a handful of intelligence and bushel of patience and you'll be right.