Staying the Course

The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be take advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down.

Benjamin Graham
The Intelligent Investor 1949

As I prepare to write this month’s investment note, with markets falling sharply into a bear market, I am reminded that I am old enough to have been here before in 1987, 2000 and 2008!

Investors reaching for yield in risk assets like equities with strong dividends and high yielding bonds will be hardest hit by this market decline.

I have long been warning of the danger of the excessive over indebtedness of public and private debt. A global economic slowdown as a result of the virus could be the catalyst that will cause a collapse in the credit market. Poor quality credit issued by many corporations and leverage loans will be the first to fall. This will also put further pressure on already falling equity prices. At times like these with prices falling sharply, it is difficult for many investors to focus on the long term and avoid the emotional response to sell into a falling market at depressed prices. This is also the time when leverage hurts! Those who have leveraged credit now face margin calls and the quality of the underlying credit will be tested severely.

Market History

The sun rises, and the sun goes down, and hastens to the place where it rises.


A knowledge of recent market history will help keep paper losses in context in times of stress and market turmoil. All markets reflect human behaviour and endeavour. This produces market cycles reflecting investor behaviour. The S&P 500 drops on average around 10% every 2 years and 20% every 7 years. From 1950 – 2018 the market rebounded from 7 of the 11 drops during this time within 12 months, the others took several years.

Y axis converted to log scale.

No two bear markets are ever the same although they may share some similar characteristics.

Our emotions when seeing stock prices fall sharply can produce anxiety, worry and panic precisely at a time when we should be calm and rational. Equally we can become overly excited when prices are rising and tempted to buy simply because prices are rising in the absence of robust analysis. Reversion to the mean is a fundamental market principle. Prices fluctuate around the mean. Cycles come and go and always revert to the mean over time. For an investor to be successful they must have the conviction that market history, to quote Mark Twain, “may not repeat itself but it rhymes” and that 100 years of stock market history shows that equities will outperform all other asset classes over the long haul. Professor Jeremy Siegel’s classic ‘Stocks for the long run’ makes the case with data going back 100 years. Much so-called investing today is nothing more than speculation. Renting not owning stocks.


However keeping your head in times of market stress will not be possible if the investor has insufficient liquidity within their strategy to carry them through a time of crisis so that they do not need to sell stocks at depressed prices realising a loss. Not having a disciplined strategy to allocate capital effectively is probably the biggest reason for failure.

Safe haven assets like US Treasury Bonds and Gold have been bid up as safe haven assets. However during the first phase of a severe price correction, investors sell what is easy to liquidate (US treasuries are the deepest most liquid market in the world) to cover margin calls to avoid them having to sell equities and other assets at depressed prices. As I write prices of US Treasuries and Gold have fallen as traders look for liquidity. This happened in 2008-9 and 1999. Investors turn to treasuries and Gold in times of extreme stress, crisis, and deflation.

Unless we understand and value what we own we will not stay the course. Rather like any partnership or marriage when the going gets tough, and it will, we are tempted to look for an escape. Sensible investors have a long-time preference. Like a marriage, owning stocks should be a long-term commitment. However, this will not happen unless the investor has a well thought out investment strategy in which they have confidence. Unlike the complexity of the modern world we live in, a strategy must be simple enough to be easily understood by the investor. However simple does not mean simplistic.

Investment Strategy

A well thought out investment strategy is key to protect an investor against behavioural errors and achieve an optimal long-term investment outcome. An investment strategy is not a collection of stocks, bonds and other assets advised by a broker or an author of an investment newsletter. However, a strategy is only as good as the discipline to follow it. Again, this will not be possible if insufficient provision has been made for liquidity. This is common sense but often overlooked.

Given that adequate provision for liquidity is made and a well thought out investment strategy is in place, sharply falling prices can be embraced as an opportunity for long term gain without fear.

A well-defined target asset allocation within an investment strategy will allow the disciplined investor to rebalance risk within the portfolio as prices of assets swing violently. This provides the investor the opportunity of redistributing profits from areas of strength into weakness whilst mitigating any excess risk within the portfolio.

This is a fundamental principle for successful long-term investment success and is helpful to ‘staying the course’. If an investor wishes to preserve capital an equity biased all weather investment strategy personalised to the family or individual has the best chance of helping the investor stay the course through turbulent markets and achieving the desired investment outcome.

Jeremy Blatch TEP
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Financial Times
The Intelligent Investor by Benjamin Graham
Mastering the Market Cycle by Howard Marks
Stocks for the Long Run by Professor Jeremy Siegel
Winning the Loser’s Game by Charlie Ellis