It is often said, and scoffed at, that this time is different. Reinhart and Rogoff (in the book of the same name) have clearly shown us that this is not the case and that throughout the history of modern economics it is true that history may not repeat, but it certainly does rhyme.
The advocates of the world changing advance of the US market leading FAANGs stocks and their brethren are admirable in their certainty, but I wonder whether they were active during the period leading up to the bursting of the tech bubble at the end of the millennium. We were, and remember going to meetings where we were told in no uncertain terms that certain companies (often making no profits at all and eating capital voraciously) would change the world.
Most of those companies are not here today and does anyone remember the Framlington NetNet fund? A stupid name even then and more so with hindsight. Investors ploughed their money into the new future and follow the seemingly relentless momentum, just like the 17th century South Seas bubble, our first stock market event of this type, and others such as Tulipmania (yes really, Google it).
Whilst I am not suggesting that Google and Amazon are going to disappear overnight as they are companies that have enormous cashflows and actually make profits, but theirs is not necessarily a one-way street and when they are responsible for almost all of the rise of the US stock market on their own, we get nervous. It jars and wakes our muscle memory.
Muscle memory is a concept most often used and discussed in sporting arenas and is particularly prevalent in certain sports such as golf, where small changes to a stance, grip, swing plane or rhythm can happen over time in a way that the player is unlikely to notice on their own. The end result is that we think it feels the same as it used to, but the results are different. Our body lies to us and it is a creeping and insidious process, but this is why there are sports coaches.
So, you may ask, what does this have to do with portfolio management? Well the last significant market move occurred in 2008, now more than 10 years ago and as we are moving towards the end of what has been (in the US market at least) the longest ever bull market, people are starting to get nervous and naturally start to wonder what it feels like when a bull market ends. Many won’t know because they were at school or university and it largely passed them by, but others will be searching their muscle memory to compare the now with 2008 (or in my case all the way back to 1987 as well!) in an attempt to decide whether the end is nigh or not.
This is one element, but even more pertinent is the effect of losing muscle memory in terms of the decisions that we made that were correct at important inflection points or changes in market momentum. What did making those decisions feel like at the time? We are wary of a kind of revisionism that can arise from the retelling of things that we experienced in the past. I think it is a common trait of the vast majority of us humans to slightly embellish, simplify or in some small way reinvent our experiences, especially the more we retell them. In the social media age probably even more so now as many live their lives larger than life through Facebook, Twitter or Instagram.
When we are looking to make decisions about changes to asset allocation, fund or stock sales or anything that might be pivotal to a client’s wealth prospects, we naturally look to our experience and muscle memory for comparison and guidance. This is magnified at inflection points where these decisions seem more important than in the more comfortable midst of a normal economic cycle. So, what did it feel like to make those successful decisions back in the day? Was it easy? Was it clear? Was it a comfortable thing to do? No, it wasn’t and never is. It is only when we are wrapped in the warm and comforting blanket of nostalgia and hindsight that any decision seems an easy one.
So when we come to make those similar decisions again we need to doubt our muscle memory and reassess, because it will feel difficult, we won’t be 100% sure, but must go through the time honoured, tried and tested processes and make decisions for our clients that reflect what the information shows are most in their favour at that time. We won’t rush to conclusions, we will make considered and good decisions based on all of the information available and our years of experience. We will fight our flight instincts and do the best that we can. It will be difficult, but we will do everything to make good decisions in a climate of uncertainty as we always have.
As Voltaire said “Uncertainty Is an uncomfortable position. but certainty is an absurd one.”
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