Looking back: What fall 2023 taught us about doing nothing
At Berkshire Hathaway’s 2018 annual meeting, Charlie Munger gave his partner Warren Buffett a backhanded compliment that drew a roar of laughter from the crowd: “Part of Berkshire’s secret is when there’s nothing to do, Warren is very good at doing nothing.”
It was a well-timed joke, but also a critical piece of investing wisdom from Munger, who died on November 28, 2023. It’s one that helped make the reputations of Buffett and Munger as the world’s greatest investors.
Successful investors take a relentlessly patient approach to managing their money. Once they have a solid financial plan in place, their default position is to do nothing in the face of troubling economic and political events and market volatility.
It’s worth looking back three years to the fall of 2023 for a real-time example of why this approach matters for building wealth. September and October of that year were dismal. The U.S. stock market declined 4.9%, while the Canadian market fell 6.4% over those two months.
Pundits had many explanations for the poor performance at the time. Was it growing fears of recession? Inflation not coming down fast enough? Global instability caused by conflicts in Ukraine and the Middle East?
Investors who did nothing in response to any or all of these worries made the right decision. The stock market bounced back strongly in November 2023, with the U.S. market gaining 6.8% and the Canadian market 7.5%.
Looking back, it’s a useful moment to check how you reacted to those market gyrations, or how you might react to the next ones.
Perhaps you weren’t even aware of them. If so, well done. The reality, however, is that many people follow the market’s ups and downs and fret about how bad things could get during a pullback. Those concerns quickly melt away when the market moves higher, to the point where people often have difficulty remembering what happened a few short weeks earlier.
Some people are so troubled by a sharp market decline that they feel compelled to act, often persuading themselves that what they’re doing is perfectly rational. That’s the work of a cognitive bias known as loss aversion: investors feel the pain of losses more intensely than the pleasure of equivalent gains. It’s a powerful force, and not always easy to control if you’re not Warren Buffett or Charlie Munger. That’s when wealth-destroying errors are made.
It’s essential to remember there will always be economic and geopolitical uncertainties, but also positive developments. In the case of the November 2023 rally, it became clear that the impetus was signals from central banks, led by the U.S. Federal Reserve, that they were done raising interest rates and were closer to lowering them.
While this underlines the importance of interest rate trends in moving capital markets, it was only evident in hindsight. The positive change in investor sentiment was no more predictable than the negative one that drove losses in the two previous months.
That’s why we hold broadly diversified portfolios and take the returns that markets offer us. It’s an approach Buffett recommends for ordinary investors who aren’t geniuses like him, and it reflects an observation often attributed to him: “The stock market is designed to transfer money from the active to the patient.”
Stock market history teaches us that if you can keep your head in the storm, you will reap the rewards when the clouds clear.
Source: Dimensional
