In a world of high uncertainty, I like to rely on solid foundations, numbers, and facts.
After years of strong stock market returns, we have recently been experiencing a return of uncertainty and anxiety. Indeed, for different reasons, the erratic actions of President Trump, in my view, are plunging us into a period almost as distressing as those of COVID-19 in 2020 or the financial crisis of 2008-2009. Since its all-time high reached on February 19, the flagship U.S. index, the S&P 500, has lost 10.2% of its value, thus entering technical correction territory. As for the Nasdaq index, primarily composed of technology companies, it reached its all-time high on December 16, 2024; since that date, it has declined by nearly 14.4%. Like these two crises, the current political situation is shaking the foundations of the economy and the world order.
In my opinion, just as during those emotionally charged periods, the best thing for an investor to do is nothing and wait for the storm to pass. That is, of course, assuming that their portfolio is well-diversified and composed of solid and reasonably valued companies.
In our management, we evaluate each of the stocks we hold in our portfolios. We analyze each of our companies based on their financial results and long-term growth prospects. Naturally, such valuations are never exact—it is difficult, if not impossible, to predict a company’s financial performance. However, we strive to make our assessments as objectively and independently as possible. Furthermore, we have maintained the same evaluation method for many years. Finally, it is likely that we make mistakes in valuing some stocks in the portfolio (both overestimations and underestimations), but across all the companies we own, these errors should largely cancel each other out.
As of December 31, 2024, we estimated that the potential 12-month return of our model private management portfolio was only 5.5%. Today, this potential return stands at 12.4%, due to the overall decline in stock market valuations. This is entirely logical: a market decline increases future return prospects.
These data do not mean that stock markets or our portfolio could not lose further value in the coming months—no one knows what will happen in the short term. However, I believe that such statistics serve as a compass for investors during periods of high uncertainty like the one we are currently experiencing.
Statistics on historical corrections and bear markets also provide a lifeline for long-term investors. Here is what I wrote on the subject in my book, Avantage Bourse:
The informed investor knows that even though the stock market has performed very well historically, its journey has not been without frequent turmoil. … From 1928 to 2021, there have been 55 market corrections (one on average every 1.7 years), 21 bear markets (declines of 20% or more; one every 4.5 years), 13 declines of 30% or more (one every 7.2 years), and three drops of 50% or more (one every 31 years).
All these corrections and bear markets (technically, a correction is a decline of more than 10% of an index from a recent peak; a bear market is a decline of more than 20% from a recent peak) have not prevented North American stock markets from delivering compounded annual returns of nearly 10% for almost a century.
I mentioned earlier that the best thing for a long-term investor to do was nothing. Upon further reflection, that is not entirely true: I should rather have written this: the worst thing to do would be to sell a large part or all of one’s stock holdings. The best thing to do would be to do nothing and wait for potential opportunities that may arise.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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