Call today 041 988 8043 Email help@informeddecisions.ie
client login

Ketamine and Fear/Greed in Irish Investing – Blog 162

informed decisions blog

Ketamine and Fear/Greed in Irish Investing – Blog 162

14th December 2020

Paddy Delaney

share

If you say the letter ‘K’ to most people, they’ll think of maybe ‘Special K’ or ‘OK’ or maybe even ‘K.D. Lang’! Others will lovingly refer to their favourite recreational drug Ketamine! Very few people I guess will automatically think of the term ‘K-shaped Recovery’ of Irish investing.

But that might change over the next year or so because there is a lot of talk about K-shaped recoveries these days in various marshmallow media articles. Speaking of constant cravings, I’ll share with you a piece of research I came across last week that almost had me crying, and but which will re-assure you in your long term successful Irish investing. (don’t get the KD Lang references? – Crying!).

(Speaking of Irish Investing, if you haven’t read it I strongly suggest you read our CGT versus Exit Tax piece from last week here)

K-shaped Recovery

I remember being at Electric Picnic festival 15 years ago (God I sound old!) and meeting a chap who was clearly a little ‘disoriented’. It might have been the fact he was wearing nothing but his underpants, or the dragon he was telling me that was on his shoulder! When I asked him what was going on he informed me proudly that he had been taking ‘K’ all day! I didn’t lead a sheltered youth but it was only afterwards that I learned he was referring to Ketamine which I believed was a form of horse-tranquiliser that was popular among the hard-core head-bangers at the time! Being a famed & powerful hallucinogen, he certainly seemed to be having a great old time with his underpants and dragon friend!

I imagine that this year has been a pretty rough year for drug-dealers, but you don’t hear anyone crying for them!? It must have been a shocker of a year – with all festivals, pubs and nightclubs shut for the bulk of the year – revenues must be down 70/80%! Why don’t we hear anyone crying-out for the drug-dealers of the world!

I jest obviously, but it is clear to us all that this year has been financially good for some and terrible for others. In conversation with a lot of people over recent times they will have shared that they have same or more income, and less outgoings. Provided they have managed their behaviours and avoided the big mistake, their investments and pensions are also up (as they always have been in 3 out of every 4 years historically). Is it socially acceptable to say to someone that you have had a good year? In the face of such numbers of deaths maybe it isn’t, but I do think it’s important to acknowledge positives if you have had some, and of course to be grateful for where we are.

There are others who have been financially hit really hard – it’s striking to read that there are 2 million people in the US who are in danger of eviction in January, once a temporary barring is lifted. Crazy amounts of lives in turmoil and terrible situations, though some say that this is a normal rate even in non C-times.

A picture paints a thousand words, and J.P.Morgan captured it brilliantly in their Quarterly ‘Guide to the Markets’ publication:

JP Morgan Sector Performance

On-line retail sector have seen stock values up 60% and Airlines down 46% at time of printing. A record-breaking year for some, an absolute shocker for others in terms of company valuations. As an aside, if you just held the entire basket of the companies with an S&P 500 Index you were up 6% – more on that in a minute.

Bifurcate

What a word – bifurcate. Beauty. Say it out loud to really get the full impact! To fork out or separate into two parts or things. As a result of the divergence and polarisation of different sectors, we now see a clear bifurcation in the recovery of company valuations. This divergence has of course been mapped by the ‘square-heads’ and subsequently squeezed for every drop by the financial media troglodytes!

US Chamber of Commerce K-Shaped Recovery

Here we can see prices of Tech & Retail stocks versus Travel & Hospitality stocks pretty-much in tandem pre-C, the prices of both then drop in Feb-March again in tandem. What happens next is where the K-shaped recovery begins. The Tech/Retail sectors boom again to surpass their pre-C prices, while the Travel/Hospitality prices dip further. They difarcate = K-Shaped Recovery. Simple as that! What will happen next with individual sector values nobody knows, some of them will increase, some of them will stay the same, some of them will decrease! If you don’t want to bet on or against any one of these you know what to do, you own the entire market!

First Signs of an Irish K-Shaped Recovery!?!

All the research is US based, and looks great, but what about Ireland!? Well to show you how easy it is to create these lovely graphs to then splash all over the internet as ‘news’ I’ve created for you what I think is Ireland’s very first evidence of a K-shaped recovery happening in this very country!!

Informed Decisions – Ireland’s K-shaped Recovery!

So here is it, Ireland’s K-Shaped recovery! No you are not hallucinating on recreational drugs – it is here! Very simply we have grpahed the values of two different stock listed on the ISEQ, showing prices from Jan 2020 to 11th December! Uniphar versus Dalata – the former is up 100%, the latter is down 29%!

Does any of this matter in Irish Investing?

If you are active in Irish investing and you own the index these K-shaped recoveries mean absolutely nothing to you – you don’t care! It might not always be as pronounced a divergence but it has always been this way when markets have significant falls and subsequent recoveries. On average the market has fallen by 30-40% every 5 years on average, only to subsequently recover to ‘record highs’ on the back of human ingenuity, innovation and growth. This has happened on average every five years since records began.

You would hopefully be far more globally diversified than this, but if you owned the ISEQ index during the above Irish example, your investments were up 3%. If you owned the S&P during the period noted in the US- based example above, your investment was up 6%. 6% is as much as most of us need in order to achieve our goals, and is almost 40% less than the S&P has historically delivered over the long term, but anyway.

Fear & Greed in Irish Investing?

Speaking of getting the results you need, most investors – not least fed by the ease of access to online trading platforms is leading many people to be having a great year with their investment ‘stocks’ . Pardon the puns but:

  • Tesla is driving a lot of the investor value at the moment
  • Apple stocks are ringing true for many investors this year
  • Air BnB recent performance is helping many investors currently sleep well at night
  • Amazon is really delivering what investors want in 2020

I should have worked for the tabloids perhaps!! Anyway, it is easy to do irish investing by picking stocks these days – provided you avoided the bottom end of the K-chart you did really well! Personally, outside of a bit of side-betting for fun and to satisfy one’s gambling instincts, I don’t believe buying and selling individual stocks in high frequency is a long term recipe for success. You want proof?

A recent piece of research showed that fund inflows into active funds (where many buy and sell stocks in high frequency) hit a 5 YEAR RECORD HIGH IN NOVEMBER. In the UK alone, £2.3Bn was sent into active funds on the back of the vaccine news! Yes, when the ship had sailed months ago, when the recover was already well and truly 8 months old, investors wanted to get back into the market having left it in March!

Carl Richards, NY Times columnist also know as the sketch guy captured this lunacy really well when he penned the below graph:

Carl Richards

Richards illustrates the idea that in good times we buy stocks that are flying it, out of greed (see record new inflows as of November!)- and as many are doing right now with Amazons and Apples etc. and then when prices fall people experience Fear, and they sell! Buying high and selling low is a natural reaction – it’s what our ‘Lizard Brain’ tells us to do! Unsuccessful investors act on the emotions of it all. Carl Richards suggests they repeat this cycle until they are broke! Their investing is driven by Greed & Fear. Irish investing is no different – this is human nature.

If you are reading this, you are likely not such an investor – you are a patient investor that recognises their human impulses, and most importantly recognises that those impulses are not to be listened to. You are in the minority, believe me – so congratulate yourself for not having had to worry about any of the K-shaped recoveries, or what Elon Musk is smoking today, or what part of your life Jeff Bezos is trying to invade this week (did you know they have moved into the pharmacy business!?). They are incredible operators and admirable in many things they do, but I don’t want my financial independence to be riding on their next moves! And importantly, your well diversified portfolio is doing exactly what you need it to without you having to waste time, energy or attention on it.

Well done you!

Paddy Delaney QFA RPA

Join the Podcast Tribe

Join the podcast membership today and get every exclusive future episode – get informed & avoid mistakes in your investment and retirement planning.

Looking For Independent Financial Advice?

If you seek a source of trusted, truly independent expertise on your investments, pensions & financial life, we can help.