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Looking Further

John Lim

IN MID-MARCH 2020, a friend and I were anxiously discussing the financial ramifications of the evolving pandemic. I posited the following question to him: Suppose the stock exchanges announced that they’d be shutting down for six months, starting the day after tomorrow. What do you think would happen to the stock market on its final trading day before closing?

Answering my own rhetorical question, I said it wouldn’t surprise me if markets paradoxically staged a huge rally—upward of 20%—the day before shutting down. Why? I reckoned market participants would be forced to look ahead 12 to 18 months, by which time COVID-19 would be more or less contained.

Many investors were flummoxed by the stock market’s violent rally off the March 2020 bottom. But they shouldn’t have been. We know that financial markets are by nature forward-looking. The stock market today reflects the state of business and the economy six to 12 months into the future.

Suppose my thought experiment had become reality—and financial markets had shuttered in March 2020. By the time they reopened six months later, in September 2020, stock prices would reflect financial conditions in 2021 or even early 2022, when the economy would likely be on the mend. But instead of waiting for markets to reopen in September, investors would have acted immediately by bidding up share prices to reflect this expected economic rebound. Such is the nature of efficient markets.

Of course, we’ll never know the answer to my thought experiment. Markets didn’t close down. But here’s my point: Looking further into the future than most investors are willing to do is the essence of being a successful, long-term investor. This doesn’t mean having stock market clairvoyance. But it does mean looking beyond present-day turmoil and heeding the proverb, “This too shall pass.”

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Roboticus Aquarius
3 years ago

Looking further into the future than most investors are willing to do is the essence of being a successful, long-term investor.

I build financial forecasts for a living, so I’m reasonably skilled at this (and I’m not equating that to market forecasts, the latter are far more difficult.) Even so, I can’t really agree with this statement. A simple 3 fund portfolio with enough bonds to match your risk profile means you don’t have to think at all about future market gyrations except to note when a rebalance is due.

However, you’re not wrong that the majority of thinking about markets seems to be extremely short or long term. I’ve been known to take a small flyer on what I believe is an emotionally oversold condition in a region or among an asset class.

Last edited 3 years ago by Roboticus Aquarius

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