2020 has come to a close, and it was no normal year. Let’s review what happened, and what we can learn from it.
- We all became epidemiologists. This was a double-edged sword for the investment industry. Whilst a ‘new’ topic for us all to read about genuinely increased and improved our individual and collective bases, it also made us overconfident in the moment. Financial markets move quickly – much faster than anyone can go from not knowing the difference between an epidemic and a pandemic to becoming an expert on how viruses affect stock prices. But investment professionals globally were this year making decisions with trillions of dollars of other people’s money on their assessment of the novel coronavirus. It was necessary, of course, for investors to react and respond to the crisis, but at To the Pound we think a bit more humility might have led to better performance. The lesson we’ve taken from this is: don’t let an ‘expert’ intimidate you on a subject; unless your fund manager is literally an epidemiologist, then they literally known nothing.
- For the third time in 20 years, a one-in-over-a-thousand probability event happened. The equity market drawdown this year was an event that would have been predicted by statistical models to happen once in every 4000 years. In fact, because it happened largely in one month, the statisticians would have predicted it to have happened once in the history of the universe. Meanwhile, the Great Financial Crisis drawdown of 2008 was only supposed to happen once every million years, while the 2000 drawdown resulting from the collapse of the tech bubble was supposed to happen once in every 20,000 years. We need models to make sense of the world, and most investors understand that models are almost necessarily wrong by definition, so the inability of models to predict a crisis is forgivable. But the lesson we learned at To the pound is: rather than trying to predict crises (an impossibility), perhaps we should just assume that a crisis is more likely than not to happen every single year, and if no crisis happens, great.
- The world worried, with bouts of panic. While worrying may have kept you healthy, panicking probably lost you money. Every (financial) ‘crisis’ is 50% danger and 50% opportunity; selling when the market has fallen substantially, or is at the bottom (with hindsight), is a tried and tested way to lock in all the danger while foregoing all the opportunity. Whether you’re 50 years old with 50% in equities or 30 years old with 100% in equities, selling in a crisis is NEVER the right thing do. It took merely 6 months for the market to recover ALL of the losses it made during the acute stage of the crisis. There are very few investors out there that only had a less than 6 month time horizon at the start of the year. And, let’s face it, if your planned expenditure was a wedding or a holiday, you probably cancelled it anyway. When you sell something, someone else is buying it. Your losses are someone else’s gains, and your foregone returns are someone else’s to take home. Don’t let someone else harvest your returns. Cool headedness is a valuable trait in investment. Practicing it could be the best investment you make. Think of it this way: if you hadn’t forgotten the password to your investment account back in March, and only just retrieved it now, you’d be in much better shape than if you had managed to log in. The lesson we’ve taken from this at To the pound is a bit nuanced, but we’ll explain some more as we go through the year: your cash buffer is not for protection on the downside, but for deployment on the way back up.
- Global morality came under review. The world this year grappled with the impossible trade-off between lives and livelihoods, and between prioritising the many strong or the weaker few. As Rawls’ theory of justice faced off against Mill’s utilitarianism (yes, we all became philosophers too), libertarians maintained their view that the freedom of (their) individuality was paramount. Countries took different approaches, ostensibly with different degrees of success, and when all is said and done, some difficult questions will be asked. As many of us thought long and hard about what we believed, one (important) guy seemed to be quite certain. In his own exaggerated, ostentatious style, Donald Trump reminded us that the job of a politician is indeed, after all, just politics, and not a lot more. The insensitivity and immorality or the U.S. executive’s leadership style continued in 2020, with increasingly profound effects on his country’s togetherness during a year when togetherness was sorely needed. Morality gained back some ground in November, but much of the damage that was caused by politicians doing politics is irreversible, so a sad legacy will remain. At To the pound we learned a few things from this: 1) Our investment toolbox doesn’t contain a formula that can measure the value of a life, let alone a million lives, and we hope nobody tries to create one, 2) The US is a strong and powerful nation, like the Roman Empire, and 3) inequality isn’t going anywhere fast
- Technology was our saviour. Yet again, technology was a total game-changer. If economics is Chief Wiggum, then technology is James Bond. The two are in a standard-of-living race with the future of society at stake. Wiggum (economics) is old, fat, and incompetent, but he wears a badge that commands our respect. Bond, on the other hand, constantly finds new ways to bend the rules, using questionable methods to achieve his end goals. We’re dubious of his morals, but we’re definitely all going to see No Time To Die when it finally comes out. Perhaps Lashana Lynch is exactly what technology needs (We hope you’re still with our analogy). In any case, it wasn’t new technology in 2020 that made the difference, it was the ability of technology to swoop in and maintain, or even improve, our standard of living at a time when economics – while in many cases doing the best it knew how – didn’t really know what to do. The broader implications are huge, and something we’ll keenly be posting about throughout 2021. At To the pound, we learned that capturing an investment theme, and looking for ways to express it, can be more fruitful than doing it the other way round. More importantly, we learned that just when you thought you were at a dead-end, technology will find a way.
2020 was a difficult year, and we’re sorry to have made you revisit it. But at To the pound we learned some important lessons that we want to share. We’re looking forward to sharing more of our thoughts with you in 2021. Happy new year!
To the pound 