History's forgotten lessons


As Warren Buffett so rightly states, people have short memories, particularly when it comes to investing.

Coronavirus is the latest in a long line of world events that have sent share prices tumbling, with global financial markets recording their biggest drop since the financial crisis of 2008.

It’s a familiar pattern; a whiff of fear which is then whipped up by a media frenzy, creating mass panic and a spiralling fall in stock prices.

For the vast majority, it’s a case of anxiously riding out the storm, hoping they won’t have to wait too long for it to blow over.

But it doesn’t have to be this way.

Let’s look at the facts. History shows that stock markets always bounce back - their long-term trajectory is very clearly an upward one.

Since the turn of the century, SARS, swine flu, Ebola and Zika have all come and gone, failing to halt this relentless rise.

And whilst we can’t predict the full impact of COVID-19, we can forecast that its effect on the markets, and the wider economy, will ultimately be temporary.

Why the mass panic?

So, as Buffett would ask, why does this cycle of panic selling keep happening? Why don’t we learn from history, taking a more measured approach and reacting with more optimism?

Let’s look at what’s actually happening and why.

Whilst coronavirus has to be taken extremely seriously, there is no doubt that panic has been induced by a sensationalist media that’s desperate for more readers, viewers and listeners.

They won’t achieve this aim with headlines such as ‘Stock markets fell today ahead of an inevitable recovery’.

Instead, their dramatic coverage sparks waves of irrational behaviour throughout society, creating a vicious financial circle – so-called bear market conditions.

Faced with this, investors may actually feel an initial sense of relief at having sold their stocks and cut their losses while they take refuge in safer havens which provide scant returns.

What they are unlikely to appreciate is the trading fees and costs in doing so and the impact this has on the overall value of their investments.

Cue the eventual recovery and they’ll face a second wave of fees to buy back in.

It’s obvious that the logical approach would have been to hold the shares throughout.

And the winners are…

But this wouldn’t suit the investment institutions and traders. Still driven by targets and a bonus culture which hasn’t entirely disappeared, they’re the only guaranteed winners.

And while this remains the case, it’s likely that the bouts of collective amnesia will continue.

It’s also why one of BRWM’s key roles is to guide its clients into thinking differently.

“We need to ensure there’s a shift from a trading mindset to an investing mindset,” explains Richard Wood, BRWM’s managing director.

“Once this happens, clients see what’s really happening is that most fund management companies are peddling a fantasy, trying beat the market and almost always failing, resulting in below-average returns.”

BRWM takes a longer-term view and avoids panic-selling, which isn’t in clients’ best interests.

“Our role is to invest, not speculate, and in fact we’re likely to purchase shares during a downturn – it’s like buying in a sale, something Warren Buffett is always looking to do,” Richard adds.

“We’ve looked at the history books - it’s just a shame others haven’t.”