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A Modest Strategy: Consistently Avoiding Big Mistakes

One of the biggest mistakes that investors make is assuming that day-to-day economic news is a useful guide for making investment decisions. Even when we know we shouldn’t let the latest economic headline drive our long-term investment decisions, it is incredibly tempting to want to do something, anything (sell this, buy that) based on the last thing we read or watched or heard.
Behavior Gap graph/illustration

Part of the job of top-notch financial advisers is to minimize the temptation to act on short-term economic news. The best financial advisers aren’t stock picking gurus. They can’t foresee future events any better than the man/woman on the street. The brilliance of great financial advisers is not some secret code or complicated algorism. More than anything, it is simply their ability to avoid overreaction. It’s in their ability to focus on minimizing mistakes, not forecasting the future or executing brilliant trades.

Warren Buffet’s number two at Berkshire Hathaway, Charlie Munger, said it best when describing the management strategy of one of his companies:

“Wesco continues to try more to profit from always remembering the obvious than from grasping the esoteric. … It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

Baker Boyer recently hosted its semi-annual Economic Update in all three markets that we serve. The goal of the Economic Update is to act as a signal in a world of noise. We aim to help our clients avoid overreacting. While we deal in uncertainties, one thing we know is this: long-term discipline is the key to successful outcomes in investing.

When we are at our best, we present global, national, and regional economic events in a common sense, plain-spoken way, without all the jumping, shouting sensationalism that you can get on some financial “news” shows. The Economic Update is designed to increase knowledge and therefore confidence and discipline. It brings clarity and understanding to our clients’ financial lives.

What started as a short presentation by Mark Kajita over 10 years ago has grown into the updates we have today. This year, for the first time ever, we have published some video of the Economic Update and along with this short synopsis of key insights we conveyed during the live Economic Update event. We hope that these tools are useful in helping you see the role that global economics plays in your day to day investing plan. And we hope it provides a little extra confidence when approaching a long-term investing strategy.

Economic Conditions

As the United States moves towards the longest economic expansion in history and global growth slows to the lowest levels in decades, the most common questions in the room are: is the US headed towards a recession? Is the globe?

Of course, the answer is yes. The next recession is always in the future. But when? While we are not in the business of predicting recessions, we see no reason to assume one is imminent. Between a slowly, but steadily growing economy, a healthy consumer and signs that business investment is stronger than it has been in years, there are no obvious signs of a looming recession.

China has seen an unprecedented economic boom over the past 30 years as they have transitioned their economy from agriculture to manufacturing and exporting. The next leap, however, will be more difficult: going from a manufacturing and export-led economy to a consumer consumption-lead economy. Deng Xiaoping described the challenge well by saying that China needed to “cross the river while feeling for stones” (摸着石头过河). It is a reminder that China’s success, thus far, has been incremental and it will continue to be so.

China is in the midst of this transition now and growth is (predictably) starting to cool as China attempts to rein in unregulated and inefficient areas of credit growth. How China manages its credit squeeze and their fledgling consumer base will certainly be a story to watch going forward, but it will be one that plays out over years and decades, not days and weeks.

Other major economies around the world are also experiencing lower levels of growth then we have seen historically, primarily for reasons related to demographics and productivity, but, again, consumer balance sheets are generally strong and monetary conditions are supportive (central banks are keeping rates low).

Market Conditions

As investors seek information related to the timing of the next recession, every new bit of economic information is fodder for market volatility, both up and down. This volatility is the sign of a normal, healthy market doing what markets do best: incorporating new information into market prices.              

The above-mentioned storylines are behind much of the recent volatility in markets. The fourth quarter of 2018 was dragged down by a December full of worries regarding trade fears and rate hikes. December’s losses were then reversed by gains in the first quarter of this year.

What should we make of these market movements? Again, volatility is not a sign of problems. Indeed, it is a sign that markets are functioning normally. This is one of the reasons that we stay invested and diversify our portfolios. Doesn’t staying invested mean that we’ll suffer through down markets? Yes, but the biggest mistake we can make is missing the big up markets.

We can avoid the big mistakes (missing up markets) by staying invested and capturing the full power compounding and long-term capital market growth.

Since the last recession and down market of 2008/2009 through the first quarter of 2019, the US market has averaged a 16% per year return vs just under 9% per year for International markets.  Over the last couple of years, we have increased our international stock exposure vs the US market, as we believe the International markets are more favorably priced moving forward. 

For even more details, please view the recording of the complete Economic Update here:

Video Thumbnail image - Economic Update

We look forward to seeing at the next Economic Update in the Fall where we can all focus on the important work of stacking the odds in our favor and avoiding big investment mistakes!

The Baker Boyer Portfolio Management Team contributed to this article. In addition to John Cunnison, that team includes Ted Cohan, Tyson Romanick, and Stuart Gillin.


About the Author

John Cunnison, CFA®

John Cunnison, CFA®
Vice President
Chief Investment Officer

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