The stock market
Past Performance is not a guide to future performance.
Have you ever noticed how differently you think about your investments during calm markets versus turbulent ones?
In the world of investing, there's a constant battle between logic and emotion. Most of the time, logic prevails, but during market declines, fear can take the driver's seat, potentially sabotaging our financial futures.
The recent uncertainty surrounding President Trump's tariff introductions is just the latest instance where market logic appears to have been overshadowed by fear. While this is simply the current "crisis of the day," it reminds us how easily headlines and short-term concerns can disrupt our rational investment thinking.
The logical foundation of investing
When we strip away the complexity, investing in global equities means becoming part-owners of real businesses. These are the companies we interact with daily, making products we buy and providing services we rely on.
As owners, we're entitled to future dividends and potential share price increases as these businesses grow. This ownership model is grounded in logic and business fundamentals.
The value of our investments is based on company earnings and profitability. When a company grows its market share, its future earnings typically increase, and the share price should rise. Additionally, quality businesses can combat inflation by passing price increases on to consumers, maintaining profit margins. This is why global equities have historically been considered one of the more effective hedges against inflation.
When story and fear triumph over logic
While the logical foundation of investing is solid, our decisions are also impacted by the stories we tell ourselves about companies and markets. During periods of positive sentiment, which thankfully occur more frequently, we tell ourselves that companies will flourish and tomorrow will be brighter than today. This optimistic narrative aligns with what we observe: humans innovating, companies developing new products, and markets becoming more sophisticated.
However, we occasionally experience periods of negative sentiment when, contrary to the evidence, people collectively behave as if the future will be worse than today. Headlines turn gloomy, and a cloud of pessimism hangs over the market.
Psychologist Jonathan Haidt explains this dynamic through the metaphor of an elephant and its rider. The rider represents our logical mind (analytical and planning) while the elephant represents our emotional self (powerful and instinctive). While the rider appears to be in control, the rider usually loses when the elephant decides to move in a different direction.
In investing, our rider understands the logic of staying invested during downturns. But when markets fall, our elephant is overcome with fear and wants to flee to safety.
Many investors surrender to emotion and make decisions that are reactions to short-term events. They sell when prices are low, locking in losses and missing the eventual recovery. However, successful investors understand this dynamic and develop the emotional fortitude to keep their elephant calm when it matters most.
Standing firm in turbulent times
What's most important to remember is that fear almost always dissipates in the end. No matter how intense market anxiety becomes, it has never proven permanent. The clouds of pessimism eventually clear, giving way once again to the sunshine of optimism.
In our years of advising clients, we’ve witnessed this pattern repeatedly. For example, during the 2020 pandemic crisis, we spoke with many investors who were ready to sell everything when markets plummeted in March, convinced that the global economy was facing unprecedented disaster. By reviewing their long-term plans and calming their "elephants," those who stayed invested saw their portfolios recover and significantly advance beyond pre-pandemic levels. The clients who remained disciplined are now in a much stronger financial position than they would have been had they acted on their fears.
In the words of Warren Buffett, "Be fearful when others are greedy, and greedy when others are fearful." This contrarian wisdom reminds us that significant investment opportunities often emerge when fear is at its peak.
If you're anxious about current market conditions, please don't hesitate to reach out. Sometimes, having a calm conversation about your specific situation is all that's needed to keep your investment elephant on a path that works for you. .
By maintaining discipline and focusing on the logical foundations of investing, you'll be well-positioned to achieve financial independence. After all, those who weather the temporary storms of fear are the ones who reach the shores of financial success.
Past Performance is not a guide to future performance.
😀 Rational optimism 😀
The media is not a friend of the disciplined and patient investor. Ignoring the key determinants of lifetime investor returns, the media focuses on short-term returns, market predictions, and negative news.
We present the following as an antidote to the onslaught of negative news:
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We hope that you enjoyed this month’s newsletter. Please let us know what you enjoyed or write back with any of your own news.
See you next month.
This article is based on the opinion of Foster Denovo and should not be seen as providing advice on a suitable investment strategy, you should not take any action based on the content of this article you should seek Financial Advice regarding your own investment strategy.
The value of an investment can go down as well as up and you may get back less than you originally invested. Past performance is not a guide to future performance.
When investing your capital is at risk.
Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority. Registered office: Foster Denovo Limited, Ruxley House, 2 Hamm Moor Lane, Addlestone, Surrey, KT15 2SA. Phone: 01932 870 720 Email: info@ fosterdenovo.com Website: www.fosterdenovo.com