“In religion, as in war and everything else, comfort is the one thing you cannot get by looking for it. If you look for truth, you may find comfort in the end: if you look for comfort you will not get either comfort or truth–only soft soap and wishful thinking to begin with and, in the end, despair.”
C.S. Lewis, one of my favorite authors, did not have investing in mind when he penned those words in Mere Christianity, though I think the statement perfectly applies to investing.
The search for comfort is the underlying cause for all sorts of financial misfortune. In the middle of a bear market, when everything is on sale and outsized long-term returns are ripe for the picking, when you should be buying aggressively, comfort-seeking would have you sell to be ‘prudent’, build cash or buy bonds to preserve capital, restructure the portfolio to higher quality businesses, hold off investing now for even lower prices, and so on and so forth. Each of those actions can be sensible under one scenario, and nothing more than pain avoidance in another. The human mind will masterfully craft narratives to support whatever we want to do that will alleviate our current discomfort.
But as Mr. Lewis suggests, when we seek comfort first–especially in financial markets–our decision making is likely short-term focused and prone to create scenarios where we will miss out, regret, and in the worst of situations, despair at costly errors.
The stock market is at times treacherous. It is always unruly. It can make you feel rich and in short order dash your confidence to pieces. That is, if you place your assurance in its short-term performance.
And yet, those with the emotional resilience and behavioral discipline to simply do nothing during market downturns, neither buying more nor selling, can go on to earn solid rates of return on their capital that will sustain their retirement or solidify their endowments and foundations. Opportunistic investors can do better still, capitalizing on the opportunities created by panicking investors.
It has been an uncomfortable year. Stock markets are down. Bond markets are down. And there is no way to know with any certainty if there are to be additional declines ahead.
Few predicted 9% inflation–present company included–and not even the supposed smartest and best informed at the Federal Reserve saw it coming.
Nine months ago, in December 2021, the Federal Reserve published expectations of the funds rate at 0.9% by year-end 2022 and just 1.6% by year-end 2023. Their latest projection has the funds rate at 4.4% by the end of this year.
Despite the Fed’s enormous failure to predict inflation or their policy plan just months ahead, their lack of humility remains as they now confidently and rapidly raise rates in hopes of righting the prior wrong. This risks replacing the initial failure of not withdrawing accommodation sooner with a growing probability of tightening policy too quickly just as inflation peaks.
The housing market is already grinding to a halt, and the full effects of monetary policy changes can take upwards of eighteen months to be felt. How then do you proceed?
Invest, don’t speculate. Stick to the basics, as they are paramount. Is this business going to be around in 10 years? Will its customers need more of what it offers? Can it charge a price that delivers an adequate margin and profit to owners? Does the underlying profit stream provide a reasonable return, compared to alternatives? If not, hold cash at 2.5%. Buy bonds at 4.0%. But if you can average 10% to 15% per year over the next five or ten years by investing in the stock of a company, then what matter is it what happens next month?
Let us run with endurance the race that is set before us (ESV Bible, Hebrews 12.1).
Yes, the path today is more crooked, rocky, and steep than we’d like. There are clouds above, and we’re weaving in and out of trees and hills and valleys. We can’t see that far ahead. But we have a plan. We’re well supplied. We know where we’re going.
We’ve consistently applied our strategy for over 13 years and generated double-digit returns. Our portfolio today is filled with wonderful businesses, run by strong management teams, that are trading at valuations that imply long-term upside that I pause to write (it’s really high). The last nearly decade and a half have been good for us. But as I look at our opportunity set today, I believe that the next decade will be even better.
Our destination is worthy of the undertaking. We need only to continue to run our race.