Two years ago, on 21 February 2020, the FTSE 100 stood at 7,404. A month later, on 23 March, it closed for one night only under 5,000. Even for those of us who had experienced Black Monday, the dot.com bust and the financial crisis, this was a heart-stopping, rabbit in the headlights market event. The UK benchmark index lost a third of its value in just a few very scary weeks.
As the market was teetering on the edge of that abyss, I was passing through Lisbon airport, looking in bewilderment at queues of people wearing face masks. By the time you read this, God willing, I’ll be on the first tee in Stellenbosch, having travelled outside Europe for the first time in two and a half years. So, it’s not a bad moment to look back at a remarkable investment journey, bookended by the simple freedom of getting on a plane.
No-one would have predicted that within two years the FTSE 100 would have risen by 50%, regaining all the losses it suffered in that pandemic plunge. Nor that the S&P 500 in America would have doubled from its low point to a level a third higher than its pre-Covid peak. I do remember James Thomson, a fund manager at Rathbones, telling me at the time that this was a once in a generation buying opportunity but I’m not sure that either of us completely believed it.
Look at a five-year chart of most stock markets and you would be tempted to ask: pandemic, what pandemic? When our children look back in thirty years or so, this may well resemble 1987 all over again - a barely perceptible blip in the long upward march of stock market history.
The rear-view mirror brings great clarity to the markets. But for me what is more interesting about the stunning V-shaped recovery in markets over the past two years is the number of quite reasonable assumptions that an investor could have made that turned out to be expensive mistakes. One of the main lessons from the pandemic is how little we know about what’s coming next when we don’t have the benefit of hindsight. Here are four decisions that would have seemed entirely rational but were wholly wrong.
First, it would have been quite understandable to decide in March 2020 that in the face of a new killer disease about which we knew next to nothing, and having lost a third of our savings, we should sell our investments and put what we had left into cash. I hesitate to say it is never a good idea to sell up after the market has fallen by 35, but history suggests the odds of it being so are long.
Second, and a few months later, it would have seemed quite sensible to say, as many of us did, that China had been first in and would be first out of the pandemic. The CSI 300 index that tracks shares in Shanghai and Shenzhen traded at 4,850 in July of 2020 when that analysis would have appeared reasonable. Today it’s 4,550. With the benefit of hindsight, a zero Covid policy looks less clever now than the, at the time, ridiculed idea of herd immunity.
Third, as the world shut down in the spring of 2020 investors jumped on the work at home bandwagon and no share captured this ‘the world has changed for good’ theme better than fancy fitness bike maker Peloton. Having come to market with apparent prescience in the summer of 2019 at around US$25, Peloton’s shares changed hands at Christmas 2020 at just over US$162. In a delicious irony for a static bike maker, the shares have gone on a round trip to nowhere. The only reason they are above their flotation price today is speculation that someone might buy the company. Like its investors, Peloton mistook a lockdown spike in demand for a sustainable interest in working out at home.
Fourth, early in the pandemic when everyone was trying to make sense of the markets, you would have been in good company if you had concluded that in a world gone temporarily mad, doing the right thing would pay dividends. Shares rating highly on environmental, social and governance factors outperformed sin stocks in both directions during the market’s initial V-shaped trajectory. Again, it was a reasonable assumption that this was because companies that did good were good companies. The reality was somewhat different. ESG (Environmental, Social and Corporate Governance) funds were just overweight the sectors that were in vogue (tech, renewables) and underweight those that weren’t (commodities, oil and gas). As ever, timing was what really mattered. An investment in renewable energy stocks did five times as well as one in Shell shares in 2020. Last year, Shell outperformed the wind farms by about 50%.
If I’d fallen asleep on the beach in Portugal two years ago and woken up today, I might wonder what all the fuss had been about. As usual, the UK stock market has ended up where it started while the US has continued its regal progress. But as these four examples show, there’s been a lot going on beneath the surface. To do better than the market you would have had to make some bold calls and time them to perfection.
If, like me, you’re not confident you can do that, here’s a three-part plan. Diversify away the near certainty that we will get many of those calls wrong. Stay invested to avoid the likelihood that we will get out at the bottom and miss the rally. And put our money to work regularly, automatically and without thought to ensure that at least in small part we benefit from those once in a lifetime opportunities.
Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63.
