Friday, March 13, 2020

We've been here before

Thinking long term in volatile markets

Many investors might feel anxious due to current market volatility and headlines about COVID-19 and oil price declines. We know that it’s at times like these that it’s most important to keep your long-term focus and stick with the investment strategy you put in place to get to Point B. Your point B, whether that’s retirement or saving for your kids’ education, won’t be affected by short-term market volatility. So why change your plan to get there because of it? The reason you have a plan is for times like this – to keep your emotions in check and think in the context of your long term goals.

Below is a collection of resources with strategies we believe can help keep your long-term focus and provide perspective on past periods of market volatility.

Investor affirmations
Want to become an above-average investor? Here is a list of 10 things people should and shouldn’t do to avoid becoming their own worst enemies when it comes to achieving their investment goals.

Worth your while – knowing the value of what you own
Does that macroeconomic event affect the value of what you own in the long term? Only if you panic and sell. But knowing the value of what you own can help you avoid reacting this way to volatility.

EdgePoint’s investment approach – Investing is most successful when it’s most business-like
The EdgePoint investment approach is deceptively simple, we buy good undervalued businesses and hold them until the market fully recognizes their potential. Understanding the approach helps investors have confidence in it to stay invested through the market moves.

An investor's journey with EdgePoint – not always a smooth ride
EdgePoint’s first decade helped our partners and end clients build their wealth. We made a video about that journey, not to celebrate the results, but as a reminder that the way there meant patience was needed during some very bumpy ups and downs.


Time after time
Why do we focus on 10-year performance? Since 1974, Time Magazine has had several cover stories about negative news and events. Those who invested in the S&P 500 Index on the day the issue hit newsstands were usually rewarded 10 years later.

Staying invested pays
Bear markets are inevitable but how you respond to them defines where you stand once the markets rise again.

Bull and bear markets in perspective
Since 1945, bear markets happened approximately every seven years. While past performance isn’t indicative of future results, looking at historical markets shows that bulls follow bears and we believe these are good times to take advantage of opportunities to build long-term value and buy great businesses on sale.

Commentaries and articles:
Our Investment team has successfully implemented our investment approach thorough many periods of market turmoil, learned from them and is stronger for it today. In periods of market pessimism, we have written to our investors on our thoughts. Here are some excerpts:

What helps us sleep at night, part 6
With all the negative headlines recently about the COVID-19 virus, we’ve received a few requests to update our “What helps us sleep at night” series. As our partners know, we don’t get too fussed by noisy headlines. No one knows answers to questions like this. Instead, we focus on the performance of the businesses that make up your Portfolios. The reality is nobody knows if the markets will experience a further pullback from here, how sharp it could be or how long it might last. However, the media is full of people willing to give you their opinion. We don’t waste our time (or yours) trying to forecast such things. Rather, we consider the facts surrounding the underlying businesses we own.

Things are always bad…or so you might believe (Q3 2018 commentary)
Armed with the fact that the market historically has experienced an average drawdown of 13.8% every year, and that paying a lower price for an investment is better than paying a high price for that same investment, there should be no drama in the head of any strong investor the next time the market moves lower. The drawdowns should be looked at as a constant, something that has taken place every year. Knowing that it happens every year and will happen again next year will make it harder to overreact and easier to act on good investment opportunities.

Understanding these two simple facts leaves less room in one’s head for the drama. Adding in some other facts and insight about the individual businesses you own leaves even less room for the drama that will be created around you at the time, giving you a much higher probability of doing something intelligent. In fact, the lower prices will make it easier to do something intelligent with your investments as well.

The most important question (Q4 2015 commentary)
What gives us the ability to buy a business below its true worth is volatility. We like to capitalize on volatility as much as possible.

As many of our investment partners already know, we believe volatility is the friend of the investor who knows the value of a business and the enemy of the investor who doesn’t. Volatility is caused by emotions. The two primary emotions that drive volatility are greed and fear.

The right choice for our families (Q4 2011 commentary)
The financial impact of emotional investing can be devastating as it causes investors to behave irrationally. The good news is irrationality creates opportunities for those who can resist it. It’s our job to live in a narrow emotional band and seize opportunities presented to us by the irrational investor.

The spotted zebra versus fortune tellers and noise makers (Q2 2009 commentary)

 “History has shown that it is not the economy that tends to hurt investors. Over the medium-to-long term, the economy has grown and will continue to do so.

Fortune tellers and noisemakers are very good at getting people to listen and unfortunately, they are also good at amplifying emotions, such as fear and greed, in investors which can cause them to make poor financial decisions.