When we look back on the investment scorecard for 2020 it will tell us little about this extraordinary year. With a few trading days left, it looks like delivering an unremarkable overall result. There have been some impressive gains (Asian shares are likely to pip the US to the post), a few disappointments (UK shares, real estate and commodities have had a year to forget), while most investment assets are up by single digit percentages.
2020 has been one of those years when the headline numbers don’t tell the whole story. In this regard it resembles 2003, when we pulled out of the dot.com bust, 2009, when the recovery from the financial crisis began, and even 1987, when the global stock market posted a 14pc gain overall that disguised a much more interesting journey along the way. As with all three of those, we are unlikely to forget 2020.
A year to remember, certainly. Also, a year in which to learn, or remember, some key investment lessons. Here are seven that have jumped out at me.
The first is that to make money in the stock market you actually have to do something. Fortune favours the brave. As I once heard Jim Slater tell someone who was picking holes in his disarmingly simple investment approach: ‘yes, but the difference is I did it.’ I did it too this year in a small way. When I got back from a week’s break in Portugal at the end of February, the market was in free fall. In the first two weeks of March I made three investments into a FTSE 100 tracker. I wish I’d chosen the S&P 500, but there you go. The best-timed of the three is up 25pc. Of course, at the time, I couldn’t know this would be the outcome. It felt horrible committing that money to the market at the time I did it. It always does when it is the best time to invest. All I knew was that, after the recent fall, the odds were improving by the day. A related lesson is that this opportunistic investment was only possible because I had some cash in my portfolio. Always have some dry powder.
The second lesson is that stock markets and economies are not the same thing. Stock markets look to the future, economies operate in real time, while economic data reflects the past. By the time we learned that the second quarter had experienced the worst recorded drop in GDP, the stock market had long moved on to anticipate the expected recovery in 2021. The V-shape of the recovery in markets is what made that March investment such a fleeting opportunity. The bear market was not only one of the fastest ever, it was quite unlike the usual structural or cyclical downturns too. Maybe the lack of economic scarring implied by the rapid rally in prices will turn out to be too optimistic but if widespread vaccinations are achieved next year it will be another striking example of the market’s prescience.
Third, sometimes the obvious investment conclusion is the right one. If you had decided early in the pandemic that video conferencing and home delivery would outperform bricks and mortar retail, airlines and restaurants, you would not have been thinking very far outside the box. That was the consensus. But it would have made you money in the stock market as the divergence in performance continued long after this had become accepted wisdom.
The fourth lesson is usually ascribed to Slater’s friend Jimmy Goldsmith. He said: ‘if you see a bandwagon, it’s too late’. I was reminded of this towards the end of November when the articles about the best-ever month in the market started to appear. By the time the dust had settled on the US Presidential election, the mood music on Brexit had improved and we’d understood the news emerging from the vaccine labs, the market was 15pc higher. And the swing from growth to value, defensives to cyclicals, was more dramatic than that. Both BA-owner IAG and Carnival, the cruise operator, rose more than 50pc in November.
Lesson number five: most of the time things stay the same but just occasionally it really is a watershed. Everyone thought that the financial crisis would change everything, but we soon got back to doing things exactly as we had before, with long-term consequences by the time we got to 2016. One of this year’s big changes is just an acceleration of existing trends towards a more socially isolated, online existence (mostly bad, but with some upsides, like working from home). Another change feels like a more significant break with the past. The shift from austerity to intervention, and the inflation it will bring in its wake, may be what we come to remember as the main consequence of the Trump/Brexit/pandemic period.
The sixth lesson is that share prices tell us something important about what the world needs. The performance of Tesla and Moderna and Airbnb is indicating that the world will be better off with more renewable transport, a coronavirus vaccine and a more rational use of the world’s already ample stock of bedrooms. It is saying we need more well-run and sustainable businesses and it is using price as the carrot and stick to get us there. The market being what it is, it will overshoot. Investors will inflate a bubble in sustainability, or ESG. In due course, it will burst but not before it has told us something important about the world we live in and will hand on.
And the final lesson from 2020? This too shall pass. Things are rarely as good as we hope or as bad as we fear. The stock market’s determination to look through today’s manifold uncertainties to better times ahead is worth hanging onto at the end of a grim year. Here’s to a happier 2021.
