Dear Fellow Investors and Friends
If you’re new here, thanks for signing up!
Today is Thursday, the 19th of October 2023. It is the 292nd day of the year, 73 days remain.
On this day in 1987, the Dow Jones Industrial average fell by 22% to a level of 5321. This caused stock markets world-wide to crash in sympathy, and gave rise to the term “Black Monday”. Today, the Dow Jones trades at 33 500, which, if you had bought just before the crash at a level of 7 163, produced an annual return (including dividends reinvested) of close to 7% p.a. If you had bought just after, you would have compounded by 1% p.a. more. This is not an insignificant difference, but also not earth shattering. I guess the message is – stick with your process and allocations and don’t try to predict markets – over the long term it doesn’t add huge value.
Quote of the day
“Success does not lie in sticking to things. It lies in picking the right things to stick to and quitting the rest.”
Annie Duke, author of “Thinking in Bets”
The word bear is derived from the Old English word “Bera”, which actually means “the brown one” and not “bear”. I picked up this interesting snippet from Darrel Bristow-Bovey’s book “Finding Endurance” – a book I mentioned a few weeks ago in letter no. 6. Bristow-Bovey points out that this word, used by the Northern European tribes, originated as a taboo avoidance term. The tribes replaced their original word for bear – “arkto” – with this euphemistic expression out of fear that speaking the animal’s true name might cause it to appear.
The most recently famous account of not naming something one is very afraid of is Voldemort in the Harry Potter novels. Nearly every witch or wizard dared not utter his name and referred to him instead with such monikers as “You-Know-Who” or “He-Who-Must-Not-Be-Named”.
The term “bear market” is another such example. A bear market is a gut-wrenching, fear-inducing and panic-stricken downward movement in markets. No wonder no one calls it by its real name – a collapse. It’s too scary. It’s the event that hangs around, just outside the light from our warm campfire of optimistic stockbroker reports and hopeful fund manager reviews.
No one wants the collapse to appear, so no one dare say its name.
Of course, humans are very good at conquering their fears and overcoming adversity. In Shakespearean times, bear-baiting was one of the most popular sports. In this brutal test, a bear would be led into a pit and then chained to a stake by its leg or neck. As spectators cheered and placed bets, a pack of dogs – usually bulldogs or mastiffs – would be unleashed into the arena to torment and attack the bear. This was finally outlawed by 1835, but after that, bears were declawed and defanged and paraded around as “dancing bears”.
Today, Teddy Bears, Gummy Bears and stories like Winnie-the Pooh have finally subverted the bear from a fearful predator to a domesticated companion.
Central Banks in developed markets have done the same. Since the Global Financial Crisis of 2007, they have flooded the market with EZ money. They reduced interest rates to 0, and many countries had negative (!) interest rates. Unsurprisingly, with the cost of money so cheap, we have not had a collapse – sorry, bear market – since. Of course, cheap capital tends to get misallocated, and I would be very surprised if that did not happen this time.
In the meantime, it definitely feels like developed markets have domesticated the bear, while in emerging markets like South Africa, he is still alive and lurking, fangs and claws bared. After all, we have had proper interest rates, and therefore cost of capital, for the longest time.
What to do? I think I have found a useful way of thinking about and dealing with the situation, and I will share more detail over time.