January 18, 2017

Excerpted from a letter sent to clients on January 18, 2017

We've often argued that trying to invest based on economic and political current events what we call "headline investing" — is unlikely to work well. (The reasons are many; a good refresher can be found here).

2016 was a disaster for headline investing. Here are some of the more prominent examples:
 
Sure, these developments will all have varying degrees of impact on markets and economies over time — but we don't know in advance which way events will unfold, and even if we did know, it's obviously impossible to consistently predict how markets will react.

Imagine an investor who was somehow able to know advance that all the following would happen in 2016: first, stock markets would start the year with a panicked decline and the worst January in history; then England would vote to leave the European Union, shocking international stock markets into double-digit losses; then Donald Trump would win the presidency in an upset victory; and then Italy would vote in a way that many thought would kill the EU. Armed with such foreknowledge, the investor might well have assumed that stock markets would not have good returns in 2016. But as we can see with the benefit of hindsight, that investor would have been wrong.

As important as certain events may seem at the time, prominence in the news cycle is not the same as importance to markets. Any given event, even a newsworthy one, is just one small part of a huge and complex ongoing series of events — so, it is crucial not to get too caught up with any given news situation of the day. We think 2016 illustrated this point very well.

This is not to say that markets will always brush off the scary headlines like they did last year. Significant downturns can and do happen from time to time; that is part of the expected path. We just don't know what will trigger them… or when they will end. Value investors will do better to discount the headlines, invest in portfolios that align with their risk tolerance, and stay focused on value and the long-term opportunities that downturns can bring.

1 — Source: Star Capital
2 — Source: Bloomberg
3 — Source: Bloomberg
4 — Source: Oaktree Capital Management
5 — Source: Bloomberg
6 — Source: Marketwatch, to cite just one of many examples