A friend recently asked how I maintain a generally positive outlook about business prospects, wondering why the possibility of a recession doesn’t seem to worry me. It’s a fair question. But the answer is not that I’m unafraid because I doubt that these events will happen. I’m not afraid because I know they will.
I certainly don’t enjoy recessions, stock market corrections or prolonged bear markets. But I don’t lose sleep over their possibility for three reasons: (1) I operate under the assumption that they are inevitable, (2) I know they will eventually end, and (3) I know that trying to predict the timing is futile. Once I accept these three realities, it frees my energy to focus on the more controllable factors in investing.
That said, there’s always the temptation, especially on days that the Dow Jones Industrial Average declines a couple thousand points, to fear that maybe this time is different. But Templeton Funds founder (and Winchester, Tennessee native) Sir John Templeton, the man who built a fortune on the aphorism “be greedy when others are fearful, and fearful when others are greedy,” cautioned against this very notion. He warned that the four most dangerous words in investing are “this time it’s different.”
The stock market and the economy are not the same thing, but they are very closely related. I have no idea if we are in the beginning stages of a significant market correction, or the end stage of a very mild one. But no one should be surprised that stock prices are vulnerable. Over the long term, stock prices move in the same direction and generally in the same magnitude as changes in earnings. But they don’t always move in sync. In the last two years, the U.S. stock market increased more than 40%, almost twice the 22% increase in corporate earnings.
On a recent CNBC segment, Jim Cramer made a very animated and passionate argument about his expectation for the stock market’s performance over the remainder of that week. I was so amused by the act of someone making such a precise near-term forecast that I didn’t even notice which direction Cramer was convinced stocks were headed. Once we accept that no one can consistently and accurately predict short-term movements in stock prices, it gives us the freedom to ignore those who peddle this kind of pablum.
Recency bias is the tendency to overemphasize the importance of recent events, even in the face of long-term evidence that might be more useful or have greater value in decision-making. Recency bias is the currency of most commentators peddling daily predictions – which has little-to-nothing to do with making good long-term decisions.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.