The quip in my column title was authored by Ray Dalio, a highly successful hedge fund manager, founder of Bridgewater Associates and successful author. I am writing near the end of a tumultuous year for a publication date early in what will hopefully become a year when life and the markets return to some level of normality. By comparison, markets were a lot more normal in 2020 than life in general.
At this time of year, market prognosticators are busily making predictions for the new year. Despite research indicating prediction accuracy is a coin toss, something in the human psyche creates a need to believe such prophesies. As you read predictions, my own included, please keep the above quote in mind. As an example, how many analysts a year ago predicted canola north of $13.00? The process, however, of thinking through general directions and possible outcomes has merit.
In my newsletter, I make annual predictions mostly to poke fun at the whole process. Surprisingly, they have been more accurate than the pros; however, my predictions for 2020 fell a little off the mark. I predicted the S&P 500 would gain over 12.5 per cent, more than double what the average of the pros predicted. As of the day of writing, the S&P 500 is up 14.3 per cent. Chalk that one up for the amateur! My Canadian market prediction was, however, off base. I predicted an even more bullish 17 per cent gain. That one goes to the pros with the TSX up about 3.3 per cent just prior to Christmas.
One of the reasons I was bullish on Canada was I predicted a commodity rebound, which I also wrote about for Grainews in late February 2020. I concluded that article with: “I wrote this article while the unfortunate Coronavirus crisis was unfolding. Oil and copper nosedived while agricultural commodities declined to a lesser extent. The longer-term impact remains to be seen, but my feeling is the crisis will only have a short- to medium-term impact. There are always regular interruptions to the general trend.”
My bullish stance on commodities has manifested, as did the prediction of COVID causing only a temporary interruption to the long-term trend, which has now resumed. Grains and oilseeds are at or above multi-year highs, as are copper and gold. Oil has rebounded nicely from the unprecedented COVID plunge into negative price territory.
Canada, however, remains an investment repellant, but the tone seems to be shifting. While the oilsands have been the worldwide scapegoat for climate change, the investment community is starting to recognize the benefit of long-life assets versus the rapid depletion of shale wells. Perhaps the general population will eventually see their value to our standard of living and economic well-being. Oscillating between reviled and revered isn’t an unusual occurrence. Nuclear, gold, Nickleback and P.K. Subban represent a few examples.
Market predictions lack consistent accuracy and can be very dangerous to your financial health if followed with gusto. They are also completely unnecessary for long-term investors. If you invested in the S&P 500 at the very top, just prior to eight large bear markets in 1929, 1937, 1940, 1969, 1973, 1987, 2000 and 2007, 10 years after these peaks and ensuing declines on average you would have still doubled your money.
Twenty years afterwards, the money would have multiplied seven-fold. This represents a rate of return only marginally less than the long-term market averages. While surprising, this makes sense as an average bear market recovery is three years. Losing three out of 20 years isn’t terribly debilitating from a long-term perspective, and bear markets are calculated into the long-term 10 per cent return rate. Investing regularly over time will, of course, enhance returns.
During this past tumultuous year, we experienced the most rapid 30 per cent decline in history, and the most rapid recovery from a bear market in history. While these gyrations were abnormal in speed, they were not abnormal in magnitude. A number of the above noted market peak to trough drawdowns were greater than 50 per cent. The market has proven extremely resilient in the past and its resilience was demonstrated once again in 2020.
Contrary to common perception, neither seer skill nor mathematical acuity are very important for market success. Personal resilience and intestinal fortitude are however important traits for benefitting from the market’s resilience.