“Fear is the foe of the faddist, but the friend of the fundamentalist” – Warren Buffett
North Korea is making nuclear threats, Donald Trump is promising “fire and fury” in response, and the Dow Jones Industrial Average dropped 200 points on Thursday. Up until today’s sell-off, the market has not paid much attention to political turmoil.
Bloomberg notes that the S&P 500 index is on course for its calmest month since August 1965, which in turn causes investors to wonder if this has been the calm before the storm. Indeed it would not be surprising to see volatility increase if geo-political tensions continue to escalate. Though North Korea is a non-factor when it comes to world trade, their proximity to China, South Korea, and Japan, all major players in the global economic picture, makes the fallout from any such action they may take meaningful for global trade.
That being said, investors should not fear the prospect for higher volatility, but process it as a regular feature of markets that is to be expected. The opening quote from Warren Buffett is from his 1994 letter to Berkshire Hathaway shareholders, and his larger thoughts on geo-political risk captures well how investors should think about these types of events with respect to their portfolios:
"Thirty years ago [referencing 1964], no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%. But, surprise – none of these blockbubuster events made a slight dent in [our] investment principles. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak. Fear is the foe of the faddist, but the friend of the fundamentalist."
What Buffett is getting at in our highlighted quote is that for those chasing short-term returns in the market, by following the latest trends, fear events North Korea can derail their trading plan. However, WhartonHill’s investment approach is not based on trading in and out of the market, but rather investing for the long-term by taking stock of fundamental factors such as valuations, yields, and economic growth potential.
Indeed, when he wrote that letter in 1994, U.S. markets were trading at all-time highs and the Dow Jones Industrial Average was trading around a level of 4,000. Since that point in time, there have been wars, two recessions, a global financial crisis, presidential impeachment proceedings, flash crashes, and many other risks. Yet the Dow currently sits at 21,900, a gain of 547%. Going forward, we cannot anticipate what North Korea will do, nor what the U.S. response will be. There might be increased volatility in the short-term. But, most importantly, we will continue to believe investors will be best served by remaining committed to a disciplined long-term investment plan.
Investment Advisory services offered by Independent Financial Partners (IFP), a Registered Investment Advisor. Wharton Hill and IFP are separate entities. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
All index and market data is via Morningstar, unless otherwise noted. Trailing returns is as of 8/31/2017 unless otherwise noted.