Adapt And Survive

Fri 04 Mar 2022

By Brian Dennehy

Access Level | public

Market commentary


Adapt and SurviveI wanted to highlight four issues today, inspired by both some teleconference questions and investment commentary in the media in recent days:

  • When to sell
  • When to adapt
  • Ukraine risk greater than pandemic risk
  • The investment industry answering the wrong question

The key to successful investing is having a process and applying it with discipline – process and discipline. 

The process isn’t just how to select funds.  The process to build your investment portfolio, in a SIPP or ISA or otherwise, has 6 steps.  These are outlined at the beginning of this blog, which goes on to deal with the third of those steps, asset allocation.

The fourth step is your process for selecting funds, and the fifth and sixth are when to review your funds (usually 6 monthly), and when to sell between those review points.

It is when to sell that concerns me immediately.

Between review points we sell if the price of a fund drops below 10% of your purchase price, or the recent high price if greater.

At least that is what we do in 9 years out of 10 (though please don’t take this too literally).

It is in that 10th year, the exceptional year, that we need to adapt.  Knowing when to adapt is vital if you want to take your journey learning how to invest to a new level.

I put that investor journey into four stages.  Information. Knowledge. Wisdom. Expert.  There is much more about this journey here, which is useful to help you self-identify where you are on your personal journey.

If you believe you might be at the expert stage you will find a check-list in that linked blog above, and the first requirement is the ability and willingness to adapt, specifically:

“You combine a mindset to continually learn with a willingness to adapt, particularly when extreme events unfold, such as in 2020.”

In early 2020 we encountered such extremes, and we don’t need to go back over that self-evident truth.

Personally, I find the risks surrounding the Ukraine conflict more worrying than the outbreak of the pandemic.  Until there was a clear vaccine breakthrough, in November 2020, the risks associated with the pandemic were beyond calculation in any useful way – yet it was fair to assume we would get a vaccine, it was just a matter of when, and how much death and economic damage was encountered in the interim.

The possible outcomes from the Ukraine invasion are much more varied, and the worst case, a world war with the threat of nuclear weapons, is worse than the threat from the pandemic, at least for the developed world and northern hemisphere.  This is not a risk we can sensibly build into our portfolios.  This is absolute uncertainty.

Yet to simply try and figure the likely impact from, and outcome of, this war, with so many complex potential outcomes, is to miss the point for investors.

You have heard from a lot of macho investment industry cheerleaders over the last week.  Complacency abounds after a 40-year bull marketI believe these people are dangerous to your wealth.

Not only are they complacent about the war, but also appear to have no sense of the pre-existing vulnerabilities of markets, so I make no apologies for re-stating these.

This is not about the war in Ukraine.  It is about a mix of dangerous cross-currents for which I know of no precedent in financial history.

Before the pandemic hit markets in March 2020, these five factors already existed:

  1. Stock market valuation bubble in the US
  2. Investor mania, centred on the US but also global
  3. Global debt mountain, of uniquely poor quality
  4. 33-year policy error supporting the stock market in the US
  5. 10-year policy error, emergency rates/QE, in the US and globally

The last two are primarily errors of the US central bank, the Federal Reserve, who kept feeding the first three elements. Investor complacency grew and grew, as did that of the investment industry.

Each of these five was unique in scale. 

This vulnerability is like the avalanche-prone snowy slope.  We just await the final snowflake – albeit of unknown timing.

Then along came the pandemic, which generated three new crises on top of the latter pre-existing vulnerabilities:

  • Energy crisis
    (investment cut in fossil fuels, just as demand spiked post-pandemic)
  • Inflation crisis
    (prices up sharply due to that same spike in post-pandemic demand)
  • Supply chain crisis
    (companies rely on components from around the globe, and supply was limited as the world gradually re-opened)

These three crises also fed on each other.

Then war.  This adds even more “fuel” to each of these three crises. The pre-pandemic vulnerability is now on stilts.

It is a matter of simple risk and reward.  The risk is a market fall in the region of 55-85% for the pivotal US stock market – see the last two teleconferences analysing the latter scale of downside risks.  In contrast, the immediate reward for staying invested is a few percent of upside.

The decision is not rocket science.

If you cannot afford to put your life savings at risk, substantially move to one side and let events unfold before re-investing lump sums. 

It’s about The Japan Problem repeating itself, as we explain in this blog, i.e.

  • Imagine the value of your £100,000 portfolio falls to £70,000, down 30%.  You do nothing.
  • It recovers a bit, and then falls again, now down 50%.
  • It recovers a bit over a few months, then down again, now over 60%.
  • This pattern repeats.
  • It repeats over a number of years – this is The Japan Problem.
  • Their stock market still hasn’t recovered from the peak of 1989, and during this 30+ years suffered falls of 80%+ at worst.
  • How would you feel if this repeated?

Your portfolio probably represents a lifetime of carefully accumulated wealth, for which you worked bloody hard.

So, what is the question which the investment industry and its cheerleaders should be answering, but aren’t?

“Bearing in mind this complex cross-current of risks, and how history informs us with The Japan Problem, do you not think it is prudent for the investing public, with their life savings in risk investments, to take evasive action?”

Prudence should mean substantially moving into cash.  The definition of a short-term safe haven is one which is guaranteed to not go down when the stock market goes down.  There is only one.  Cash.

Oh and just in case you still have the niggly-naggly thought that the US stock market today is nothing like Japan in 1989, do read our What Is A Superbubble?  Be afraid.  This is inspired by the work of acclaimed US-based investment house GMO.






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