Investors currently have to grapple with one of the most uncertain investing environments in recent history.
There are so many things going on right now it’s challenging to figure out which is the most pressing, especially from an investment perspective. The coronavirus is a global health emergency, and it has caused untold economic pain around the world.
Brexit is also on the agenda once again. It’s looking increasingly likely that the UK and EU will fail to reach an agreement before the end of this year.
Further, the US and China have resumed their bickering. It looked as if the two parties had put their differences behind them at the beginning of the year. Unfortunately, Covid has now re-ignited tensions.
Then there is the issue of monetary easing. Global central banks have embarked on an unprecedented spree of money-printing to stem the economic fallout from the coronavirus crisis. This has had an enormous impact on global financial markets, which now seem to have become immune to economic pain and uncertainty.
As Alasdair McKinnon, the investment manager of the Scottish Investment Trust (which the author owns in his portfolio), noted in his latest half-year report to the trust’s investors:
“Governments have created a tremendous source of new money that, bluntly, will have to go somewhere. The money printer, to reference a popular internet ‘meme’ has gone ‘Brrrr’. The crisis has allowed the adoption of extraordinary and open‑ended fiscal and monetary measures that would not previously have been countenanced under the guise of ‘prudence’.”
We live in uncertain times, and many investors may, quite understandably, be asking, what’s next?
The answer to this question is, quite simply, we don’t know.
Knowing what we don’t know
Uncertainty is a constant in investing. We never know what the future holds for the economy, stock market or individual company. All we can do as investors is to make an educated guess.
In that respect, the current environment is no different from any other.
And once we acknowledge the fact that the future is unknowable, we can work out a plan to deal with future uncertainty.
In his must-read book, Poor Charlie’s Almanac, Charlie Munger presents a ten-step list that can help even the most experienced investors plan for uncertain times.
His ten rules, in no particular order, are:
- Measure risk
- Prepare ahead
- Have intellectual humility
- Be independent
- Analyse rigorously
- Allocate assets wisely
- Have patience
- Be decisive
- Be ready for change
- Stay focused
Individually, all of these rules can help investors prepare for uncertain times. When used together, they can be a robust toolkit.
Using the checklist won’t prevent you from making mistakes, but it will help you prepare for uncertain times, and avoid rushing into any high-risk investments you don’t understand.
For example, by just measuring the risk of an investment, you can gain a better understanding of the risks and threats that may destabilise the company. This, in turn, would help you to prepare ahead, and also be independent in your thinking.
In other words, by acknowledging that we don’t know what the future holds, we can be better prepared for the uncertainty that lies ahead. This approach has and always will be crucial in investing. With so much uncertainty surrounding the outlook for the global economy, it’s now more critical than ever.