Crises change, investor behaviour doesn’t

26 August 2022

There is a strange dichotomy in investment markets that continues to make life interesting for its practitioners. “This time is different” has been labelled the most dangerous statement in finance, and in many ways, it has proven to be true over the decades. Howard Marks, in his book “The Most Important Thing”, starts a chapter with this thought.

“I think it is essential to remember that just about everything is cyclical. There’s little that I’m certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky. Few things go to zero. And there’s little that is as dangerous for investor health as the insistence on extrapolating today’s events into the future.”

Learning that concept, internalising and understanding it, is probably one of the most important lessons a professional investor can learn in their lifetime. There is the perception of safety in being part of the herd; joining in the exuberance of others when the market is running hard – or being down in the dumps when the bears are ruling the roost. But that is not where superior performance sits. It is also where we find the dichotomy.

Every crisis is different

Since 2000 we have had the IT Bubble, the Great Recession of 2008, the Covid Crash in 2020 and the recent bear market that is still in search of its name. Overexuberance in IT, indulgences in banking and lending, a global pandemic and extremely loose monetary policy, inflation and a new European war were among the precipitating factors. Knowing what to be on the lookout for is an exceedingly difficult task, and many of the feared scenarios often do not come to pass or have negligible effects.

Yet regardless of how unique the cause of each crisis is, the behaviour of the crowd seems to be remarkably similar. Investors’ behaviour seems to be one of the few constants in investment markets, and 2022 was no different.

What remains important is that each crisis also has some unique features. 

This time around the unique feature was that many of the traditional methods of diversification failed, at least for the first couple of months of 2022. We saw a massive sell-off in bonds that coincided with a bear market in equities and crypto assets. At the same time, South African investors saw a rally in the rand that coincided with a global risk-off move for the first time in decades. All of this resulted in many of the local multi asset funds underperforming expectations in the short term. Much of this only lasted for a couple of months, but in those months, we once again saw that this time is no different.  Regardless of the underlying dynamics of the crisis, investor behaviour remained remarkably predictable. In the depths of the crisis, portfolios were abandoned, and positions changed.       

It is one thing to commit to maintaining positioning when times are good. It is quite another to carry that through when there is “blood on the streets”. A consistent, flexible, multi asset approach to investing remains the best choice for all clients in all circumstances. The most important thing we must all remember for it to work at its best is that “cycles always prevail eventually.”