History is written by the winners – that’s true in investing as in war or politics.
For example there are lots of books about great investors such as Warren Buffett and Jim Slater who turned small sums into vast fortunes.
But who will write about your mate Barry who lost his savings betting on gold miners and Bitcoin?
While daily media coverage of the market does a good job of highlighting its volatility, I suspect even well-informed investors disproportionately hear about success.
Consider active fund managers – most of who lose to the market over time.
These managers are required to produce regular reports, and they rarely waste the chance to highlight the great successes and opportunities in their portfolios.
Few highlight their mistakes – though these are the ones we should pay attention to.
And when their funds are wound-up or merged after years of underperformance, it’s rare anyone writes an obituary explaining where it all went wrong. (Coverage of Neil Woodford’s spectacular blow-up is the exception that proves the rule!)
Similarly, Hollywood made a blockbuster film, The Big Short, about the guys who scored billions betting on the sub-prime housing meltdown ahead of the financial crisis.
Nobody has rushed out a sequel revealing how many of those hedge fund managers’ subsequent calls were wildly off-target.
It’s not brain surgery
The truth is it’s easy to make bold and contrarian pronouncements when it comes to the stock market, but it’s much harder to be right.
In other domains, deviating from the consensus whilst sounding smart is much harder.
Brain surgeons or nuclear physicists rarely say everyone else is wrong or stupid.
Would you trust a neurosurgeon who’d come up with a new method of brain surgery in the bath over the weekend?
As for physicists, their new contrarian ideas are right so rarely that when it happens they give them a Nobel Prize.
In contrast investors – both professionals and you and me – make such calls routinely, whenever we buy shares we think are cheap, or sell shares we deem expensive.
And at times like these – when the market is reeling from the realisation of what the coronavirus could do to economic growth – everyone is peddling such ideas on how to make a profit from the overreaction, or to protect your wealth from worse to come.
Cruise control
In a year or so, we’ll doubtless hear about the brilliant trade that this or that investor made at the height of the panic.
We’ll probably keep hearing it from some of them for years to come!
When that happens, ask yourself whether they really were incredibly insightful – or just lucky when heads came up in what was basically a coin toss.
Because we’re living this right now – and how it will play out seems very far from clear.
For instance, as I write the share price of Carnival is down around 40% from January, on the not unreasonable grounds that nobody wants to be quarantined on a boat during a pandemic, and so sales of cruise trips could fall.
Yet Carnival shares didn’t seem hugely expensive to some investors (including my colleagues at The Motley Fool) even before we’d heard of COVID-19. If the outbreak can be curbed, the bounce in Carnival’s share price could be swift and giddy.
Then again, if the virus keeps spreading, maybe Carnival is holed beneath the waterline.
Is it at all clear – given what we know now – which of these outcomes is most likely?
I’d suggest not.
I wouldn’t bet on it
The market is full of these examples at times of stress like this.
The plunge in the share prices of everything from oil companies and fashion brands to engineering specialists means valuations are far more appealing than a month ago…
…provided we don’t stand on the precipice of a deep global recession.
Yes, I can see a case for slowly putting spare cash to work in diversified funds that you intend to hold for the long-term, into baskets of shares from your watch list, or even into individual companies where you’re sure the long-term thesis will hold up whatever.
But I’d argue it’s too soon to make heroic calls on tourism and travel companies, say, whose shares have been pummelled on virus fears. There are grim scenarios where some of those companies could really suffer, or even fail.
Admittedly it may turn out I was wrong to be too cautious.
But never mind – history will only care about the winners who got the call right, so I shouldn’t be too embarrassed!