Three Lessons From a Turbulent 2018

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“The financial memory is very short.”

– John Kenneth Galbraith

2018 was a lousy year for investors.

Despite a heroic post-Christmas Santa Claus rally, the U.S. stock market closed its worst year since the financial crisis of 2008.

The Dow industrials were down 5.6%, the S&P 500 off 6.2% and the Nasdaq 3.9% lower.

Global stock markets fared even worse.

Both the Stoxx Europe 600 and the U.K.’s FTSE 100 declined 13%.

Nor was the news better in Asia. Japan’s Nikkei Stock Average fell 12%. Hong Kong’s Hang Seng tumbled 14%, posting its worst one-year decline since 2011.

The worst-performing major stock market of 2018?

China’s Shanghai Composite finished 2018 down 25% – marking its steepest one-year loss since 2008.

In short…

2018 was the lousiest year for investors in more than a decade.

At times like this, I like to reflect on some of the timeless lessons I have learned over my 20-year investing career.

Here are three of the most important ones.

1) Don’t Watch Financial Television

You have access to more information on the smartphone in your pocket today than Warren Buffett and George Soros ever did back when they were cranking out 30% annual returns.

Yet I bet your investment returns haven’t improved a bit.

Take comfort in that you’re not alone.

The George Soros wannabe hedge fund managers of today have struggled to match the returns of U.S. index funds over the past decade.

Too much “information” about markets has made profitable investing even harder.

Back when I regularly appeared on financial television in New York, I became friendly with one of the producers.

She revealed something I had never realized…

Financial television shows are modeled after sports broadcasts.

The similarity is obvious, once you think about it.

After all, tracking every tick of the market is much like following a sporting event…

Nonstop action, fast-paced scoring and real-time analysis by experts who aren’t on the playing field.

That explains why financial television producers often come from sports programs.

The lesson?

Financial television is not about doling out profitable investment advice.

It’s about entertainment.

That’s why I may occasionally appear on financial television…

But I never watch it.

2) “Plus Ça Change, Plus C’est La Même Chose”

Translation: “The more things change, the more they stay the same.”

In financial markets, it always seems that “this time it’s different.”

It’s different on the way up: “The Internet will change everything.”

Investors said the same about railroads in the 1880s, radio in the 1920s and Russian stocks after the fall of the Berlin Wall in 1989.

It’s different on the way down: “We’ve never seen a meltdown this bad.”

They overlook the “end is nigh” predictions for the U.S. economy after the now-long-forgotten financial panics of 1819, 1837, 1873, 1901 and 1907.

Few investors have the kind of historical perspective to understand that there is little new under the financial sun.

I knew several students who studied at Harvard Business School and went on to manage hundreds of millions of dollars on Wall Street and in London.

They may have gone on to be very successful during long-running bull markets…

But many often fail spectacularly once the inevitable bear market arrives.

That’s because they did not use their time in school to steep themselves in the lessons of financial history.

This past summer, I reread a handful of investment classics, including Edwin LeFèvre’s Reminiscences of a Stock Operator and Nicolas Darvas’ How I Made $2,000,000 in the Stock Market.

I find historical accounts like these calming.

In reading them, I always relearn a crucial lesson…

The more financial markets seem to have changed since the days of the ticker tape, the more they have stayed the same.

3) “This Too Shall Pass.”

I’ve now had the good fortune of living through dozens of Mr. Market’s mood swings.

And perhaps it’s this experience that allows me to understand all of these mood swings are temporary.

And the more extreme the move… the more extreme the rebound.

When I was an emerging markets portfolio manager in the late 1990s, Russian stocks tumbled well over 90% in a few months.

I remember putting in a buy order for a Russian oil stock after the crash at $5 per share in early September of 1998.

I was ecstatic when I sold it after it bounced to $15 only two weeks later.

That same stock went on to quadruple to more than $60 per share.

I was right in the short term. But wrong in the long term.

In an example closer to home, Amazon (Nasdaq: AMZN) cratered 94% after the dot-com bust.

How many investors bought (or held on to) Amazon after that drop?

Hard to tell.

But one guy who did hold on is Jeff Bezos. And he became the wealthiest man on the planet.

The takeaway?

Most of the “information” you hear on financial TV is just noise. Ignore it.

There is nothing in the markets today that hasn’t been seen before.

Financial markets almost always rebound. And the more extreme the move, the bigger the bounce.

Good investing,

Nicholas

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