Several ancient Greek philosophies incorporated the notion that wisdom was demonstrated by equanimity in the face of the external world. The Stoics expressed this wisdom through the word “apatheia,” Epicureans through “ataraxia,” etc. The key to attaining wisdom is studying and accepting the natural order of things and living modestly. Without this wisdom there is no true happiness and people are prone to being afraid, according to the Greeks. The Stoic word apatheia originally meant a state of being peacefully calm and steady, whereas the later derived word apathy came to mean utter indifference. Similarly Epicurean ataraxia meant tranquility, which was key to seeking the highest pleasure via a simple scholarly life. Later the concepts of a tranquil and scholarly life were dropped, and this gave rise to seeking pleasure without moderation and the modern concept of hedonism.
As we look at the stock market volatility, much lower levels of volatility from 2013-2017 seemed to lull many people- not us. Indeed the 10% declines in February startled some people as if they had been rudely roused from an afternoon nap. The subsequent volatility prevented them from dozing off again, and now they are a bit lacking in equanimity. However, so far 2018 seems to us to be only slightly more volatile than normal, and it would be wise to happily accept this. After all, volatility helps produce attractive entry and exit points for stocks, so in some ways we should welcome the increased volatility. Furthermore, it would be miserably unwise to lose our cool and hedonistically pursue short term gains.
Tug of War
We know a lady who greatly enjoyed all the benefits of yoga, and also greatly looked forward to the action packed drama of the TV series 24. Not much would stop her from missing either yoga class or 24 (DVR was not an option at that time). One season, the yoga class was scheduled on the same night as 24, with not much time between. She would go from a totally mellow state to a hyper alert state every Sunday night, and have a tough time getting to sleep.
As it pertains to the markets, similar dichotomies exist between extrapolations about how politics and policy might impact the future and what the companies are doing on a day to day basis. An internet search for financial articles with the phrase “tug of war” yields copious results as far back in time as we cared to look. In zero sum games, every gain occurs at the expense of something else, and there are always multiple tugs of war taking place. This causes individual stocks to usually be far more volatile than the underlying businesses, and creates uncomplicated opportunities both to buy and to sell. In the very short run the economy and the markets are zero sum games. However, in the long run neither the economy nor the stock market are zero sum games, as each gets bigger and bigger. Wisdom indicates calmly enduring the short term tugs of war that are an inseparable part of the natural order of long term investing.
Since the last US presidential election, there have been periods where it seemed market movements were primarily based on expectations for large policy changes, hence the market movements were large too. There have been other periods where it seemed that market movements were primarily based on fundamental developments (for better or worse) on a company by company basis. To our thinking, February and March activity were driven by the former, and we expect the focus to be pulled to the latter as earnings season commences and the year progresses.
Global trade negotiations are using posturing tactics and generating news headlines that we have not seen in a long while, so it is quite unsettling. The stakes are certainly high, and it is no laughing matter. However, our expectation for now is that parties will eventually come together, make deals that no party is fully happy with, and catastrophe will be avoided. The belief that trade wars are bad for everyone seems practically ubiquitous, and we take this as an indication that the odds of a global trade war are fairly low.
What would Marcus Aurelius Advise?
Marcus Aurelius was one of the last major Stoics, referenced in the first paragraph. His writings are nearly the only surviving Stoic documents. A compilation of thoughts from his later years were recorded in Meditations, though it was never meant for publication.
To adapt Meditations to investing:
Book 4.12: Two kinds of readiness are constantly needed: (i) to do god’s will; (ii) to change your mind when you are wrong, and never because it is more appealing or popular.
Book 3.13: Doctors keep their instruments handy for emergencies. Keep your investment philosophy handy too. Fundamental bottom up picking should not ignore the big picture; and the big picture should not ignore bottom up fundamentals.
Book 4.24: Do less and do it better. Unnecessary thoughts create unnecessary actions.
Time is the friend of a rational investment process, if one has the temperament to consistently apply it. Managing your daily temperament is critical to long term success.
Owning good companies for long periods of time has historically been a prudent method for compounding your capital over long periods of time. Do not let short term volatility disengage you from this.
Know what you own. Know why you own it.
Aurelius, Marcus. Meditations: The Modern Library, 2002. Print.