Luis García Álvarez, CFA MAPFRE AM
In an interview with CNBC in October 2008, Warren Buffett claimed that his work as an investor was “simple, but not easy.” Just over a year earlier, English fund manager Richard Oldfield had published his autobiography. In it, he explained his work philosophy and summarized the lessons he had learned over several decades. The title he chose for that book? “Simple But Not Easy” (Doddington Publishing, 2007).
With this phrase, both Buffett and Oldfield managed to define the often-forgotten essence of our profession. Investing correctly is not easy. In fact, it is actually quite complicated. But to make decisions when there is an overload of information, it is essential to try to simplify problems as much as possible. What are we looking for, exactly? What will truly define our future profitability?
This task is particularly difficult in the current era, as we are exposed to a constant bombardment of data and information. Often, it is simply noise that distances us from what is really relevant. If we pay attention to it, we forget what is important and make our task even more complicated.
The recently deceased Luis Eduardo Aute once said that “we have an overdose of information and an absolute lack of knowledge.” In investments, sometimes the problem arises directly from our struggle to look in the right places. If we cannot ask ourselves the right questions, we will most likely not find the answers we need. As 19th-century French theoretical biologist, physician and physiologist Claude Bernard pointed out, “the experimenter who does not know what he is looking for will not understand what he finds.”
Benjamin Graham, the father of value investing, warned that Mr. Market often behaves like a manic-depressive who gets carried away by his short-term impulses. His obsessions focus on the here and now, forgetting the importance of looking at the long-term. Let’s imagine that this imaginary character had met the Genie of the Lamp five years ago and the Genie agreed to answer some questions about what the future would be like.
At that time, Mr. Market was extremely concerned about political events the outcome of which was to be known in the following months. In that situation, he would surely have chosen to know whether the United Kingdom was going to vote favorably on its departure from the European Union or whether the dreaded Republican candidate Donald Trump would become president of the world’s most powerful country.
Knowing the answers to these questions, he would certainly have run to sell all his shares. The consensus view at the time was that, if both events were to take place, they would have devastating effects on the global economy and on financial markets. However, the following years proved to be tremendously bullish for world stock markets.
Now, let’s imagine that the Genie of the Lamp reappeared in the present day, amid widespread concern over the terrible pandemic we are experiencing. Most likely, Mr. Market would once again get carried away by his fears and short-term concerns. He would ask about what is currently occupying most of the space in both news programs and the reports of most financial analysis firms. However, even if these are extremely important issues – and more tragic from a humanitarian point of view than Brexit or the American elections – they may not ultimately determine our long-term profitability.
If, instead of his old acquaintance Mr. Market, the Genie of the Lamp met Buffett or Oldfield this time, the conversation would probably be quite different. As long-term investors, we should be concerned about other things. If the timeline based on which we make our decisions is the next five years and not the next three months, the questions we ask ourselves will be different from those of the imaginary character created by Graham.
In our work as long-term investors, we should take more time to investigate what consumer habits will be like in the future rather than try to guess what date the quarantines will be lifted (hopefully soon). We should be more interested in imagining what the future of mobility is going to be like than in knowing the decisions of the OPEC meeting in the face of the scarce crude oil demand caused by the crisis. We should be more concerned about which countries and companies are preparing better for the coming decades than about trying to estimate exactly what the temporary economic impact of this dramatic pandemic will be. And this should be the case with many other issues.
Contrary to popular belief, perhaps this is not the time to make big changes in our investment portfolios, beyond taking advantage of the volatility of these weeks to make some adjustments. We managers are tempted to think that in situations like this, our responsibility is to be more active than ever, buying and selling stocks non-stop. However, success in our work often consists precisely in knowing when we should hold fire and be patient.
This is why our activity these days should not be very different from what we do at any other time. We should preferably meet times of crisis with our homework already done (i.e. with the companies analyzed). The most productive task we can do over these weeks is to try to isolate ourselves from the (inevitable) noise and continue to think about how the world will be in a few years’ time. This is the only way in which, if one day we are lucky enough to meet the Genie of the Lamp, we will be able to ask him the right questions. Simple, but not easy.