Legendary investor Peter Lynch said, “Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.”
Timing the exact bottom of the market is a difficult task, but we think it’s easier to make a long-term investment decision because short-term developments are too unpredictable.
Key developments that we see in the market
Investors need to understand that the stock market is not just about the financial side of things, but it is also about the human side.
I can calculate the movement of the stars, but not the madness of men, said Isaac Newton, 1720 after losing a fortune on stock market speculation.
People have feelings which make market timing difficult to calculate during critical market corrections.
The Central Bank’s fight with inflation is continuing especially in the UK and Europe as inflation remains stubbornly high.
When will Central Banks ease interest rates? There is no exact time when it will occur, but roughly speaking, interest rates have picked up in the U.S., while in the UK, there is more work to be done by the Bank of England to control inflation.
The number of initial public offerings (IPO) and activity in the mergers and acquisition space has slowed in 2023.
The world has evolved from low-interest rates and high valuations to high-interest rates and falling valuations.
Investors’ appetite to invest has decelerated, and they are cautious as key worries about Central Banks and geopolitics have risen.
The financial news coverage has been negative, especially regarding the poor health of the banking system.
Historically the inverted yield curve has a decent track record of predicting recessions.
The Buffet Indicator is based on the total market capitalisation over the economy (GDP) indicating the market is currently significantly overvalued and investors should expect a 2% return including dividends.
The rising American debt ceiling is making investors nervous as investors are questioning how much more they can raise? Is it sustainable to keep borrowing instead of finding a smart long term solution?
In addition to the Russian-Ukrainian war. The question investors are asking is will this war escalate beyond Ukraine and lead to NATO involvement.
There is also tension between China and Taiwan. We do not know exactly how far these tests of geopolitical risk will go.
Would the United States and its allies defend Taiwan if China tried to invade it?
China’s share of world trade is over seven times larger than Russia’s and constitutes about 19% of all American manufactured goods imports.
Imagine what sanctions on China would be like for the world.
It would have terrible consequences; the supply chain would collapse, economic activity would decline significantly, and our current issue of inflation would get worse; as a result, inflation would soar.
Time in the market beats timing the market
The market is pricing future returns will be lower. I am not sure how we can accurately predict the future when we are not there yet.
However, while we do not have privileged access to the future, history teaches us. It’s always difficult to time the market but to remain diversified and invested, especially during times of high uncertainty.
It’s easy to become negative when markets fall but if we look back at data from 1928, being out of the market for just the best 30 trading days would have reduced your return by half.
Another example is Amazon shares traded for $5 on the first day in 1998. The stock price had risen to $85 by 1999.
However, after the tech bubble burst in 2001, Amazon’s share price fell by 93% to $6.
The majority of people would panic and sell their shares in such a situation.
Amazon’s share is now $115.5 which is equivalent to $2,310 taking into account the 20-for-1 share split.
This is because the best and the worst trading days happen close together.
We have to remember that it’s time and patience, not timing the market, that leads to real wealth accumulation. As Warren Buffet once said, the stock market is a device for transferring money from the impatient to the patient. Here at Minerva Money Management, we believe investing in extraordinary businesses run by visionary founders is the key to long-term success not timing the short-term market noise.
Awet Ghirmay, Head of Investment Research
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Risk warnings
*The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
