“Nothing in life is to be feared, it is only to be understood.”
– MARIE CURIE, Nobel Prize Winner
While I was catching up on my reading this week, I came across a chart that gave me a good chuckle. It seems the folks at BlackRock have developed a convenient “tracker”—what they refer to as a “geopolitical risk dashboard”—to help investors monitor worldwide events and how they might derail our investment portfolios.
I have always found it interesting that investors seem to reserve their greatest fears for the impact of exogenous variables, like weather events, geopolitical tensions, etc. Some examples of these fears include predictions like:
- Economic realities are going to catch up to the fictional growth rates in the Chinese economy.
- The bubbling Italian debt crisis is a drain around which the Western world’s economy is circling.
- The mounting debts of the United States, and its limitless printing of money, will set off a hyperinflation that will cause the dollar to be worth less than toilet paper.
- Another hurricane like Katrina will plunge the United States’ economy into a terrible recession.
These fears have nothing to do with the infinitely resilient workings of the private economy. They have nothing to do with the actual economic performance of actual companies. Let us never forget that stocks are shares of companies, which represent a direct ownership of the earnings, cash-flow, and assets of businesses which you yourself patronize. They are not poker chips in some vast geopolitical casino.
I much prefer this chart, which tells the real story:
For the last 70 years, despite all kinds of geopolitical disruptions, the outstanding companies that make up the United States economy and stock market have managed to do just fine.
At Concentus, we never attempt to analyze or predict the outcome of current events because they are too unpredictable. Instead, we always counsel that if your goals haven’t changed, you ought not to change your portfolio. Of course, it is easy to see the counter culture in that policy. All you have to do is to turn on the television and watch the talking heads on the news tell you how to position your portfolio to react to the latest global developments. This is all nothing but a bunch of hot air because absolutely nobody can predict how geopolitical events will impact your investments, and those who try will end up looking foolish.
Uncertainty—in the markets and in the world—is the only certainty. Most people mistakenly believe that the world is alternately moving from periods of uncertainty to periods of certainty, and that all we have to do is wait for the next period of certainty to get here. The truth is that the world is constantly moving from one crisis to the next. There is always a “crisis” happening somewhere; the world lives in a permanent state of instability.
“Among the four most dangerous words in investing are ‘this time is different.’”
We counsel rationality under uncertainty, which means that history is the best guide to the long-term future. Our firm is guided by a famous quote from legendary investor Sir John Templeton who said, “Among the four most dangerous words in investing are ‘this time is different.’”
Popular culture and the financial media have taught us to believe the exact opposite—that markets are ruled by chaos and unpredictability driven by geopolitical uncertainties, and that any order we might perceive in the markets may stop functioning at any moment.
Although markets may appear unpredictable and chaotic to us, we must accept that perhaps our emotions may be causing us to misunderstand the chaos, and that it is in fact just part of a larger order that we do not understand, and therefore fear. As Nobel Prize winner Marie Curie said, “Nothing in life is to be feared. It is only to be understood.” The capital markets are never to be feared. They are only to be understood.