Market Comment

Everyone has a plan, until they get hit in the mouth


One is reminded of a well known boxer's observation on plans and experienced reality, after the last week of extraordinary market volatility.

Last Friday, the US 10-year Treasury yield surged 0.443 of a percentage point on Feb. 2, to a four-year high of 2.85%, on the threat of higher inflation, after the January US jobs report, released that morning, showed that wage growth had increased by the highest monthly rate since 2009.

A sharp reminder that essentially all assets worldwide are priced in relation to 10 year US Treasuries. In the period since the great financial crisis, investors had grown used to a world of muted inflation, low bond yields and slow, but steady growth. But everything seemingly has now changed. Higher growth, higher inflation, higher bond yields, higher volatility. This was a very long time in coming, the painful re-adjustment when risk is re-calibrated back to something resembling normality.

“The real key to making money in stocks is not to get scared out of them.”

— Peter Lynch

This will eventually play out, over time. Overall it should be seen as a positive change. Positive relative to a fantasy world of excessively cheap money and mis-priced risk. Positive as well if this allows dedicated, patient managers to find outstanding companies selling at outstanding prices. This after all is the essence of long term, value orientated investing.

Across the globe, money managers who are paid to seek out value, who have waited patiently for this, will now be redoubling their efforts to find those rare opportunities.

As Peter Lynch once noted, “the real key to making money in stocks is not to get scared out of them.”

This is indeed what the investment business should really be substantially concerned with (as opposed to the business of following a trend by tracking an index, or worse, fiddling around with exotic and impossible to understand 'products'): making judgments on valuation, exercising patience and guile, understanding your investment inside and out, adding on weakness, and yes, trimming on excess. Doing this over and over again in a consistent manner. Then, when you get 'hit in the mouth', you are more able to remember your plan and to stay the course.