Seven years ago I had the pleasure of listening to Jim Rickards (and others) in the ballroom of the W Hotel in Santiago, Chile. There were perhaps 500 people seated in the room at the time. We were particularly struck by his use of the following thought experiment.
How would you react, for example, if you happened to be there, and then suddenly one member of the audience suddenly shot up out of his or her seat and bolted for the exit, without explanation? Probably you would be intrigued by this development – but you would perhaps be unlikely to act upon it.
So how would you react if ten people then suddenly shot out of their seats, without warning, and dashed to leave the room? Chances are, you’d start to think about joining them, even though you had no idea why they were acting that way.
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Everybody will have a number (of people suddenly leaving) that will cause them to join in the exodus, and that number will probably be somewhere between one and fifty, say – but it will probably not be the full 500. What’s your number?
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To bring it a little closer to home, imagine that you arrive at your favourite restaurant, only to find that one of your fellow diners is wearing a face mask. The chances are, you feel curious about this development, but probably you do nothing about it.
Now imagine that you arrive at your favourite restaurant to find that all of your fellow diners are wearing face masks. Do you decide to stick around? Perhaps they won’t even let you in without one.
Markets and the madness of crowds
The role of the crowd in investing tends to rise to prominence only during periods of extreme market stress.
Then, investors who would ordinarily be the most rational and logical of actors are suddenly plunged into doubt, and willing to sell their positions – not because of any negative developments in the underlying health of the businesses they partly own, but on the back of the unfathomable terrors being experienced by people they will never meet.
In his latest Diary of a Fund Manager, David Miller of Quilter Cheviot shares his thoughts about the novel coronavirus that has surfaced in Wuhan, Hubei Province, China.
He notes that, on the one hand, coronavirus appears to be less lethal than Sars, which broke out in 2003. But on the other hand, China is far more interconnected to the rest of the world, both in terms of movement of people via flights, and in terms of its importance for supply chains.
What’s the conclusion? Well, as Miller puts it: “So as I write this rather sombre Diary, the bottom line is that we just don’t know. We have been through 13 ‘similar’ events since 1981, all of which proved to be short- term interruptions to progress.
“Medical solutions are found and, encouragingly, this time the authorities seem to be taking decisive action. Central banks are ready to cut interest rates and pump liquidity into the system if required. Franklin Roosevelt said, ‘the only thing we have to fear is fear itself’. Easier said than done.”
Don’t try to time the market – invest in assets you are happy to hold onto
For our own part, as ever, in terms of assessing the macro outlook, we will only know whether it was “right” to be panicked out of investments after the fact.
At this stage we hold by our standard response to exogenous market events, which is to stay on course and try to focus on what we consider sustainable bottom-up valuations as opposed to the unpredictable and perhaps irrational behaviour of other, possibly weaker, hands.
It may feel reassuring to be “out of the market”, albeit on the back of the actions of others, but it leads to the equally frustrating debate about when on earth to get back in.
Could it, perhaps, be better not to be bounced out of investments we consider fundamentally sound (and inexpensive) in the first place, and let genuine asset class diversification do its best to steady the overall portfolio ship?
