Change -- The Investor's Only Certainty

The markets have been going through a protracted and agonizing testing of the lows they reached in October 2008. On an intraday basis the S&P 500 today broke those lows and briefly touched the closing lows of the previous bear market reached on October 9, 2002: S&P 776.

There are few investors alive today who have gone through markets as ugly as the current one. No bear market since World War II has been down as much as this market is now down from the peaks it reached in October 2007. The S&P 500 index is down 48.5% from its peak reached in that month, as of yesterday's close, surpassing even the bear market of 1973-74.

The current crisis meets the definition not only of a bear market but also of a panic, as we noted in this previous post. Selling has reached irrational levels: the market is priced as if there has been no value added since 2002. This is irrational.

However, markets are forward-looking, and they represent the sum of what investors feel about future value. As such, it is reasonable to conclude that many investors right now are acting as though the entire system is going to fail, or at least experience a contraction unlike anything since the Great Depression.

During times like this, our first point is that we do not believe the system is going to fail. In fact, the seeds of recovery have already been sown, as we have pointed out in this post and will discuss further in future posts.

Nevertheless, it is also true that "change is the investor's only certainty." Forty years ago, in June of 1968, Thomas Rowe Price wrote a short pamphlet entitled "The New Era for Investors." The late Dick Taylor, who managed portfolios with Mr. Price and from whom the investment process used at Taylor Frigon Capital Management is descended, kept a copy of that bulletin, which contains insights that are valuable today.

In particular, that pamphlet contained a paragraph which reads:

"Keep in mind that forecasting the future is always a very difficult task. Opinions are bound to be only partly accurate because of the unforeseeable and unpredictable events which change the normal or expected trends which appear logical at the time. This is why hindsight is always much easier than foresight. By way of illustration, it is almost impossible to foresee such events as wars, assassinations, and nature's catastrophes, such as floods, droughts, famines, etc. Also, inventions and changes in personal leadership influence the course of history. A forward-looking investor must be able to reasonably assess and evaluate the currents and the tides and be prepared to reckon with winds or storms, which are unpredictable. He must be constantly alert. He must stick to the basic concepts which have proven sound over a period of centuries, be flexible of mind and be willing to change opinions, change tactics, and not stubbornly stick to old opinions and buck new trends, or try to swim against the tides."

This tension between the dictum "stick to basic concepts which have proven sound" and the requirement to "be flexible of mind" is something we have written about before, for instance in the January post "Remaining calm without being blind or obstinate."

The most important lesson from this voice from forty years ago is that massive change is nothing new or unique to the present time. In fact, in the 1968 bulletin, Mr. Price refers to a 1966 bulletin he wrote entitled "Change -- The Investor's Only Certainty."

The frame of mind described in the paragraph above -- that the investor "must be constantly alert" and "willing to change opinions" -- is clearly valuable today. The upheavals of the 1960s and the 1970s, which Taylor and Price experienced, were not the end of American capitalism -- far from it.

The future will not look exactly like any previous decade; in fact, as the paragraph above reveals, current opinions and predictions will no doubt turn out to be "only partly accurate." But the attitude of holding to proven principles while remaining alert is an important lesson from a professional investor who lived through the 1920s and the 1930s, and who survived and succeeded by following those tenets.

For later posts dealing with this same subject, see also:
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