By Craig McAvinue – 1 December, 2023
“Using volatility as a measure of risk is nuts. Risk to us is 1) permanent loss of capital or 2) the risk of inadequate return.”
On the heels of a run of negative monthly returns in most developed markets, November saw a bounceback with some very positive figures. The first month we’ve seen in the black since July …
Data table is from Google Finance
As is usual, when markets are up, the USD cash became less attractive, so we saw the greenback giving some of its value back to other currencies.
Data table is from Google Finance
So November saw the largest monthly gain of 2023 in the S&P 500 and most other developed markets followed suit with very strong months.
Whilst 20/20 hindsight is a wonderful thing, there were some glaringly obvious signs that a strong end to 2023 was likely. Underlying economic data has been strong, with quarter three US GDP data way ahead of expectations. As I wrote about previously, inflation is generally under control and with quarter four seeing a boost in consumer confidence and the traditional “Santa Rally” still around the corner, gains exceeding 20% for 2023 look likely.
Trends pay an important part in investment strategies. Whilst we always advocate building long-term capital growth around owning quality, trends and value plays also have their place and shouldn’t be ignored.
I mentioned the traditional quarter four market rallies in the past, with history showing that 80% of the time markets are higher at the end of December than they are at the start of October.
2022 was a horrific year for markets which saw nearly a 20% fall. This century, when we have seen a significant fall in any given year (2001 and 2008), we saw positive returns in each of the following five and nine years respectively.
Significant annual gains exceeding 20% are not unusual, having happened six times since 2000. On seven occasions we have seen the S&P improve over 10%.
These numbers, whilst indicating a buyers’ market, also again illustrate that volatility exists. With greater than 10% movement in 17 out of the 23 years this century, swings like this are actually the norm. This is a primary reason equity portfolios are considered the highest risk. However, as long as your equity exposure relative to your time horizon is well-managed, you will get the best returns in this space.
Identifying quality businesses and holding your investments in these businesses has long been the mandate of Warren Buffet and Charlie Munger, considered by many to be the greatest investors of all time. Last week, we lost Charlie at the grand old age of 99.
Cited by Buffet as being his “right hand man,” the two investing greats took Berkshire Hathaway from US $19 share in 1965 when Buffet took over the business to more than US $500,000 share, a staggering increase of some 2.5 million percent.
I find it apt to quote him on this occasion, as one of his great traits was a mindset that allowed him to shut out the noise around aspects such as volatility and inflation. He had a long and extremely successful life, making billions of dollars and giving away billions in the process.
His quotes always carry deep perspective and, much like his more famous partner Buffet, he was a master at keeping things simple. One of his more recent comments when we were experiencing the high levels of inflation last year encapsulated this attitude when he said,
So, rest in peace Charlie, and may we all learn from your significant legacy.
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