Learnings from economists and successful investors as COVID-19 grips markets

Ever noticed that the world’s most successful investors and high-profile economists have memorable quotes and a philosophical flair to their writing style? It’s because times of crisis call for a calm, big-picture view, and absolute adherence to the fundamentals of investing.

Our chief economist, Shane Oliver, has always had a penchant for quotes about investing. As COVID-19 continues to shake markets and confidence, that collective pool of wisdom acts as a compass for investors of all varieties.

The learnings of financial professionals and seasoned investors who have survived and thrived despite epidemics, recessions and market crashes been and gone, is far more helpful than the noise and panic currently stemming from an abundance of information and misinformation.

Investors on the road to retirement who are still haunted by the GFC are, especially and understandably, shaken at the moment. The very presence of fear is as clear an indication as ever to stick to the fundamentals of investing, not the temptation of emotion, even where accumulation horizons are more limited.

Long-term learnings and strategies are, in times of crisis, your best bet for seeking protection and opportunity. Here’s how some of the most tried and tested lessons in modern investing history can apply to the COVID-19 outbreak.

Lesson: “The four most dangerous words in investing are: ‘this time it’s different,’” John Templeton.

For an investor to think a good or bad run in the markets will last forever is inherently dangerous, and as history shows, not how markets work. It follows that selling in panic, for fear of no horizon for gains or recovery, will only lock in a loss.

In an ominous piece last year about being prepared for a market crash¹, Forbes notes the S&P 500 index average annual return, since it began tracking 500 stocks in its index in 1957, hovers around 8 per cent.

S&P historical annual returns since 1927. Sources: Forbes, S&P 500 Historical returns

When you look at the fine print of fluctuations, losses and gains, it holds true that the investors who sold when the market went down would have missed out on strong recoveries.

Just as cycles repeat themselves, there is an element of predictability to responses from global authorities to a human or economic crisis – that is, they will and do respond with impactful measures in times of crisis. This is comforting for markets and investors during the COVID-19 panic.

“One of the things that panics people is not being able to see the finish line. Inevitably, that finish line comes into sight when there’s a human response, and we are seeing that again here,” said Brad Creighton, portfolio strategist in the dynamic markets team at AMP Capital.

“There are containment measures, isolation measures, various policy responses being tested in multiple countries. It takes time to formulate these plans and then to assess their effectiveness. People who panic in these moments – when the end isn’t quite in sight, miss out on the opportunities in the recovery,” he said.

One example to draw on here is the Troubled Asset Relief Program (TARP)² the US government launched during the GFC, in a bid to prevent avoidable foreclosures and stabilise the economy. Treasury committed about USD457 billion to relief packages. Though it remains a contentious measure, it began the process of stabilisation in in equity markets^3,4. There were also unconventional monetary policies, like quantitative easing, enacted by the Fed, to get the economy back on track⁵.

“Experts will always work on the problem. This time, it will involve federal governments, world health bodies and central banks worldwide. The G7⁶, for example, has already said it will be using its economic tools to tackle the impact of COVID-19 head on,” Mr Creighton said.

“Our economic and financial system is designed around the idea of rising living standards; health and prosperity, and the people in charge are working with those objectives in mind, as they’ve always done.”

Lesson: “Be fearful when others are greedy. Be greedy when others are fearful,” Warren Buffet.

The crowd is a powerful force, particularly in the 2020s. The difference between a crisis now, and one like the GFC, is the relentless wave of information – often unverified and unchecked – finding its way to literally the palm of our hands.

With that in mind, it’s understandably tough to fight the force of a wave of people heading for the exit, particularly when you’re protecting your retirement nest egg. For Darren Beesley, head of retirement at AMP Capital, this behavioural tendency is a real risk to long-term wealth creation and protection.

“We as a species have evolved with embedded natural instincts to flight or fight in times of crisis. The tendency for retirees to watch their investments closer and have a greater care-factor for their investment outcomes makes a lot of sense – they are less capable of replacing these savings. However, as a result, there can be a flight to safety at the worst possible time,” he said.

Acting on the ‘flight’ reflex also means, as discussed above, you miss out on opportunities you’d otherwise be on the hunt for. As Shane Oliver reminded investors this week, when shares fall, they are (of course) cheaper and offer higher long-term return prospects.

“So, the key is to look for opportunities the pullback provides,” he said.

Further, in the midst of this market madness, some sectors look poised for a boost. Dermot Ryan, portfolio manager and analyst, is charged with creating income focused opportunities at AMP Capital. Though he doesn’t believe markets are at peak panic yet, and that the impact of COVID-19 may play out for longer than expected, he notes some stocks are likely to feel a surge in Australia.

For example, in the near term, healthcare stocks are likely to get a boost, as a result of governments worldwide starting to put surge capacity into hospitals, for example. Also, more people will work from home, meaning telecommunication companies also look set to benefit as broadband and mobile data packages are upgraded.

“Overall, it’s important to stay calm, this too will pass. Don’t panic and change your long-term asset allocation, in fact, look for opportunities to deploy long-term investments in equities at attractive valuations,” Mr Ryan said.

Lesson: “Successful investing professionals are disciplined and consistent and they think a great deal about what they do and how they do it,” Benjamin Graham.

In the age of information, investors are consistently hounded with articles, statements and opinions which lack evidence, rigour and analysis. We have normalised the noise, and in fact, built technologies and platforms to support it.

People who are charged with being guardians of their clients’ capital mean they have a responsibility to apply strict and refined filters to incoming information, to effectively guide investment decisions.

The overarching, key things investment professionals are watching for are:

The daily number of new cases
Policy stimulus, support measures
Measures of economic stress.

For Mr Creighton, the responses which are springing up across the world are cause to believe that this outbreak will be contained, despite its current unpredictability.

“Fear causes us to entertain the belief that this situation cannot be controlled, which is not realistic. Control takes time; time to gather information and decipher the best course of action,” he said.

“Authorities seem to be responding along these lines. The actions by central banks and individual governments seem designed to buy time, to keep the economy moving and businesses and people solvent while information is gathered and responses are calibrated to the situation at hand,” he said.

“As more data comes in, we see that China’s containment measures are having an impact and South Korea’s high rates of testing have been effective in progressing towards containment. It gives other countries a roadmap for success and you can begin to see that this as a solvable problem.”

¹ https://www.forbes.com/sites/camilomaldonado/2019/06/25/are-you-prepared-stock-market-crash/#667c863e268e
² https://www.theguardian.com/business/2008/nov/24/citigroup-bailout-banking-sector
³ https://www.treasury.gov/initiatives/financial-stability/TARP-Programs/Pages/default.aspx#
⁴ https://www.washingtonpost.com/opinions/why-tarp-has-been-a-success-story/2011/03/25/AFEe6jkB_story.html
⁵ https://www.forbes.com/sites/greatspeculations/2015/11/16/quantitative-easing-in-focus-the-u-s-experience/#62e673b4528d
⁶ https://www.bbc.com/news/business-51720267