Why There’s Nothing New About the “New Normal”

Coverage of the 2011 Global Investment Conference

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471274_deloreanIt is a common assumption that we are passing through unsettled times as global markets and economies recover, to varying degrees, from the dislocations of 2008-2009. For many investors the painful volatility of that period seemed a particularly sharp change from the generally stable market and economic trends of the preceding five or six years.

The reality is that volatility has always been a regular feature of the market cycle. Economic or political crises erupt and markets tumble, but the impact eventually fades as the events triggering the volatility recede. To take a current example, the price of oil has been a volatile factor in recent years but the outlook was very different just a decade ago. In 1999 the price was US$10 and expected to fall further on excess supply. Yet by 2008 crude commanded US$135 per barrel and observers predicted US$200 oil. A few months later the price collapsed.

Every generation produces a chorus of consensus that “a new normal” has emerged and presages a permanent, long-term shift in equity markets. In the 1970s, “the Nifty Fifty” were the 50 stocks every investor should buy and hold. In the 1980s the mantra was “Japan is the new Number One”, reflecting that economy’s global reach and seemingly flawless corporate model. The bull market of the 1990s generated the “Dow 36,000” theory, a forecast that the bellwether index would soon triple. Each “new normal” was eventually disproved and Sir John Templeton’s dictum that “This time is different are among the most costly four words in market history” was validated once more.

But some things do change: investment managers who focus on the intrinsic value of a security and its underlying company are becoming scarce. During the past 30 years the numbers of index funds and investment managers who essentially mimic an index or sector have steadily grown while the ranks of stock pickers have thinned. This has contributed to a gradual convergence in performance and steady decline in stock holding periods while consensus earnings forecasts regularly lag actual earnings. One likely reason is a well documented human predisposition for action vs. inaction, or, more precisely, reaction. Investing driven by short-term events and data, of which there exists an ever growing stockpile thanks to technology, is no strategy. It is merely a reaction.

In contrast, a solid value investing philosophy adheres to ten maxims first articulated by Sir John Templeton:

  • Invest for real returns
  • Keep an open mind
  • Never follow the crowd
  • Everything changes
  • Avoid the popular
  • Learn from your mistakes
  • Buy during times of pessimism
  • Hunt for value and bargains
  • No one knows everything
  • Search worldwide

It is also worth noting that despite recurrent bouts of volatility, the number of stocks in the MSCI World Index with positive returns has far outstripped those with negative returns every year except one (2008) since 2003. A classic example, now largely forgotten, of how periods of volatility can present the best value occurred in Great Britain in 1984 when a national miners’ strike paralyzed the economy. The benchmark FTSE 100 equity index reached 1064 that year and the outlook was grim. Yet an investor who chose that point to enter the market would have reaped gains of 22% in a year, 53% in two years, and a very rewarding 87% three years later.

Martin Cobb is executive vice-president, portfolio manager/research analyst, global equity group, Franklin Templeton Institutional.

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