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RATIONAL LONG-TERM INVESTING IN A REORDERING WORLD
Induced by Russia's tragic war on Ukraine, we find ourselves in a significant shift in the world's geopolitical order.
As Howard Marks documents in his most recent essay, the offshoring of manufacturing to Asia has run afoul of well-documented and quite severe supply chain issues. Hovering over them is the growing realisation that China cannot be relied on to be a rational actor.
Finally, we find ourselves in the grip of the most severe inflation outbreak in 40 years, created primarily by an expansion of the money supply far beyond the economy's needs.
So what should we rational investors do?
No one can begin to predict how these situations will resolve themselves…much less when. Nor can anyone begin to imagine how the capital markets will adapt to said resolution(s). We are once again in a perfect Cloud of Unknowing.
It is also irrelevant to the investment policy of a long-term, goal-focused, plan-driven investor. And I say again: current events are perfectly irrelevant to the investment policy of the long-term investor in a globally diversified, Evidence-based portfolio.
What, after all, is the essence of successful long-term equity investing? Surely it is the continuing practice of rationality under uncertainty. But what does that even mean? To me it means basing our investment policy on our financial plan as distinctly opposed to a view of the economy and the markets. This is where rationality begins and ends.
Two years ago, we could not begin to imagine how lethal the pandemic was going to be, nor when (or even if) effective vaccines would become available in sufficient quantity. Today, we can't anticipate what Putin will do in Ukraine, nor how the back of this inflation will ultimately be broken.
Nothing has changed; we've just moved on to a different set of unknowables. Meanwhile our retirement dates are bearing down on us at the same pace. The amount of money we need to accumulate has if anything gone up with inflation. And the only hope we have in the world for a secure retirement and meaningful legacy is the premium return of equities, whose short- to intermediate-term ebbs and flows cannot be anticipated, much less timed.
What we can know amid all this uncertainty—and just about all we need to know—is that the great companies in the world are already adjusting to this reordering. Just look at the massive write-offs they're taking on their exposure to Russia. I'm guessing that they're in the tens if not the hundreds of billions.
Meanwhile, there's abundant liquidity in the financial system. The consumer's balance sheet is as healthy as it's been in 40 years. Unemployment is cratering; indeed job openings are at record highs. Everyone who can work and wants to can find employment at rising wages. In every important respect this is the mirror opposite of the Global Financial Crisis, when banks had zero excess reserves and the consumer was leveraged to his eyeballs.
Today's crisis invariably becomes yesterday's news, and, not only will we not be worried about this stuff ten years from now, we likely won't even remember it. (Do you remember that the equity market went down nearly 20% over six months in 2011 because of a raging government debt crisis in Southern Europe, the threat of a U.S. government shutdown, and S&P downgrading the debt of the U.S. Treasury? No? Well, neither does anyone else. That's my point.)
It all comes down to acting vs. reacting: keeping your head down and continuing to fund your plan, looking neither to the right nor to the left. History not headlines. This is a glorious time to be a mainstream investor for the long haul—even if, just at this moment, it feels like we can't see a foot in front of our faces.
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