The Viewpoint: Five investment lessons for today’s markets

News travels fast these days. It wasn’t too long ago a daily newspaper was considered ‘fast’ media. Today with social media, news travels instantaneously.

Reading a book can seem archaic in comparison. This creates numerous challenges, one of them being the ability to process information in a way that can benefit investment decision making. Whilst quantity can have a quality of its own (it can be better to have more information than less) it can also overwhelm and lead to bad decisions. How do we manage this? I would point to five investment lessons which can help in current markets.

Adapting versus forecasting

Investors have struggled with a lack of predictability for some time now. In the 2010s, economies and corporate profits were predictable, growing within a narrow range. It was a good time for investors with predictable economic growth and equity markets. This changed in 2020 when Covid hit - since there has been significantly volatility in both economic growth and share prices. This year alone we have had tariffs, unprecedented European stimulus and an industry leading AI model out of China.

This begs the question, has investing become more about adapting than forecasting? If the biggest macro events have become unforecastable, the best we can do is adapt to them after they occur. For fund managers this creates some important consequences. If we can’t predict then we will have to run broader portfolios to manage risk, quite different from the highly active funds of the past. If we can’t predict, we’ll also have to be mentally flexible, able to change our minds in a timely manner as new circumstances prevail.

Micro beats macro

This is an idea I have written about in my blog previously. Over the long-term, I think that innovation, business fundamentals and other micro or bottom-up issues will trump macro. Ask investors what the most important economic event of 2007 was, and most would reply the start of the global financial crisis. In reality, and despite the extreme issues that caused, I see the launch of the iPhone as having had a much bigger impact. A single piece of innovation was in the end more important than the biggest financial crisis since the great depression of 1929.

We can see this in a less dramatic way too. There is genuine concern that the US will head into a recession, as a result of tariffs and general economic uncertainty. Over the last few weeks, we have met the CEOs of several companies with large US operations. They cover financial services, software and industrial areas of the economy. None have seen a slowdown in activity so far. All of them note that at the micro level, companies they serve continue to do business as normal. Infrastructure investment and digitisation of the economy continue at pace. For now, at least, micro beats macro.

Pessimism is expensive

As the saying goes, if you want to be a successful journalist, be a pessimist. If you want to be a successful investor, be an optimist. People are quite pessimistic by nature and have a habit of seeing what can go wrong, not what can go right.

Warren Buffet retired as CEO of Berkshire Hathaway this year, at the age of 94. In a philosophical moment, he was asked what is the secret to a happy life? He answered the need to be able to focus on the good things that have happened. If you do then some bad things can occur, but you can still have a wonderful life. Investing is the same, it is important to focus on the good things which have happened, alongside the recessions, trade wars and other bad things. Despite all of these, returns for equity investors over the last few decades have been very good.

Investors overreact to the short term and under react to the long term

This lesson is a manifestation of the idea that we overestimate the short-term impact of technology yet underestimate its long-term impact. Again, this comes back to human nature where we are much more influenced by near-term events than long-term thinking. The internet did create a stock market bubble in 1999, thanks to an overestimation of its short-term impact, yet still went on to transform the world, the long-term impact.

This lesson has relevance today with respect to tariffs, whereby the near-term economic consequences of them may have been overstated as economic growth has continued, yet the longer-term consequences could be profound. If the underlying message from the US is capital and investment is less welcome there, and that it will no longer play its role as the global police, then globalisation in its current form will likely change. It is possible the global economy will break into three broad regions – North America, Asia and Europe – each of which will have its own opportunities and risks. Markets have barely started to discount this scenario.

Innovation drives growth

Over many decades, there’s been a strong correlation between innovation and growth. In the last 60 years we’ve seen the mainframe computer, PC, internet, smartphones and now AI transform the world we live in. Each of these waves of innovation has created significant investment opportunities and risks. In the last 15 years most of the value creation in the global economy has come from the so called Magnificent Seven, large US technology companies which have innovated to create new markets.

This is important as we live in unusually innovative times. AI has the potential to be much more impactful than the internet and to benefit all businesses and consumers. Obesity drugs have the potential to meaningfully enhance the health and wellbeing of a major segment of society, including reducing addiction to harmful substances as well as weight reduction. If innovation drives growth, then there are good reasons to be optimistic.

Moral of the story

• Absorbing and processing the news we see all around us is a real challenge. Using these five lessons though I would conclude:
• Investing is becoming more about adapting than forecasting and investors will need to reflect that in their approach.
• Markets may be overestimating the short-term impact of tariffs but have not begun to discount the long-term consequences of them, which is where performance will be accrued.
• Micro or bottom-up trends such as the roll-out of AI, will be at least as, if not more, important than even the biggest of macro events.
• An optimistic bias to what may happen in the future is likely to result in a better investment outcome.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.