March takes its name from Mars, the Roman god of war. In ancient times, Martius was the first month of the Roman calendar, which tells you something about the ancients’ priorities. With weather warming up, it was time for soldiers to ‘march’ off to do battle for The Empire. Today, we all have our regular schedules marked to do battle for various needs and causes. And then there are those random skirmishes that pop up; one example … the People of Texas vs. Winter Storm Uri.
In the financial world, the struggles are varied; some are brief, others constant. Last January, a merry band of Robinhood traders armed with trading apps battled with hedge funds. Some did well, but there were also many casualties. These uprisings typically have no long-term effects on markets, but do make for interesting headlines. On the other hand, there are much larger and ongoing conflicts that affect the investment world.
Inflation vs. Deflation - Central banks and policymakers constantly focus on this most important battle. Countries and societies have suffered greatly when they experienced too much of either. The Great Depression (deflation) created great misery and precipitated World War II. In the 1960s, Lyndon Johnson’s ‘guns and butter’ policies led to soaring prices (inflation) and agony for savers. From 1968 - 1982, it was nearly impossible to earn real returns in the stock and bond markets.
Narratives vs. Numbers – The narratives folks are motivated by stories. These ‘momentum investors’ don’t mind paying $1.50 for $1.00, hoping to unload it for $2.00, $5.00, maybe $10.00 down the road. After all, who doesn’t like a good story? Front-page regulars include Tesla and Bitcoin. Yet, neither provides an underlying stream of income or earnings. Numbers people, or ‘value investors’, are looking to buy $1.00 for $.80 … or less. Warren Buffett, the patron saint of value investors, once said ‘in the short run, the stock market is a voting machine, but in the long run, it’s a weighing machine’. I prefer the weighing machine.
Left Brain vs. Right Brain - “We have met the enemy and he is us” wrote Walt Kelly, the famous cartoonist in 1972. Just thinking about investing can be a battle. We humans are subject to emotions (fear, greed, envy), as well as various biases (recency, inertia, familiarity, trend-chasing, confirmation, sunk cost) to name but a few. Of all the psychological battles, the one I find most interesting is recency bias - thinking the future will be similar to the past. Evidently, the Securities and Exchange Commission agrees; ‘PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS’ is a required warning on the front page of all investment prospectuses … in bold font, just to make sure.
We’ve had a twelve-year bull market in stocks, and a forty-year bull market in bonds. This years-long recency bias has buttressed animal spirits. But consider this; in early February, Texans had experienced a mild winter and were looking forward to swimsuit weather. Few imagined the snow and ice that was soon to come their way.
Happy March, and good luck in your battles.
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Copyright © 2021 - Any opinions are those of James Aldendifer and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.
