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202010816_BlackRock Fundamental Equities Expert to Expert

Episode 3: Behaving your way to investment success

Part 1: Lessons from an unusual year


James Bristow, BlackRock Senior Portfolio Manager

Morgan Housel, Author, behavioral finance authority

Carrie King, Deputy CIO of Developed Markets, BlackRock Fundamental Equities

Carrie King: Welcome to Expert to Expert, a BlackRock Fundamental Equities video series that pairs our investment pros with the business heads, politicians, policymakers and academics who are leaders in their fields and influencers in our global economy.

Together they explore the topics that are driving markets and shaping investor decision-making.

Our third episode explores the art and science of investing, pairing a BlackRock expert in fundamental research and investing with an authority in behavioral finance.

In Part 1 of their three-part conversation, James Bristow and Morgan Housel reflect on living through a most unusual time in history.

James Bristow: Hello everybody. It's James Bristow here. I'm really happy to be joined here today to talk about markets with Morgan Housel, who many of you know is the author of The Psychology of Money.

And really the first subject that we're going to discuss is, it comes under the heading, this hasn't been a typical market cycle. When we look at the big drawdown we saw during COVID, and the subsequent recovery, many aspects of the regular playbook haven't really played out in this market, because it's been a unique scenario. And Morgan, I'd love to start with a question for you of, what's your sense of what you saw of how people behaved in that March 2020 period when markets took the big drawdown, and how they reacted to how information changed thereafter.

Morgan Housel: Well thank you so much for having me, James. I really appreciate the opportunity to do this It's such a good question. I think to me the biggest difference with what's happened over the last year and a half in the market, is if you compare it to 2008-2009, the last market crash, 2008 and 2009 was a financial crisis. That was the crisis, was the economic collapse. So that's what people were paying attention to. The last year and a half has been different because it was a biological crisis. It was a virus. So the stock market collapse that occurred last March was almost a sideshow at the time for most people. Because most people last March were not necessarily paying attention to their portfolio. They were saying, am I going to get a virus that's going to kill me? Can my kid go to school? Is there enough food at the grocery store? That is what people were worried about last March.

So I think for your average investor, in the United States and around the world, what most people were thinking about last March was very different from what they were thinking about in 2008. And then of course the other big difference is how quickly it all recovered. By the time that most people were back towards paying attention to the rest of the world outside of COVID last year, the market was back recovered, at an all-time high in the United States. So it's a very different fundamental than what took place in 2008.

Now if there is one quirk on this, I would say it is this. If you look at the economic crisis last year, away from the stock market but looking at unemployment, those kind of things, I think 2008 made it very easy for people to say this is bad, this is terrible, but this is a one-off crisis. This is a once-in-a-century event. Whereas now that kind of the same thing occurred with COVID, and you had another economic collapse, tens of millions of people losing their job. I think it's easier for people around the world to suddenly say, maybe this is just how the world works. Like, fool me once in 2008, but now I realize this happened again. Maybe just every 10 years the world breaks. And this is how the world works. And I actually think that's a pretty good way to think about risk, is that once per decade, roughly on average, the world breaks in a fundamental way. But I think more people believe that now than did one and 1/2 years ago.

James Bristow: Yeah I think that's right. And one of the most notable statistics I always pull out from that period is, if you look at the GDP, the macroeconomic hit in the U.S. from COVID and its current effects, we at BlackRock calculate that as being roughly a quarter of the size of the hit we saw during the GFC.

Caption: COVID crisis saw a fiscal response four times greater than during the Global Financial Crisis (GFC)

But when you look at the size of the fiscal response, and this is before all the monetary policy actions that were taken, that fiscal response was four times the size of what we saw in the GFC. So policy came to the rescue in a way that was really quite unprecedented. And I think, that again, made navigating this environment particularly tricky.

Morgan Housel: One thing that's astounding in the United States is that we have spent more money, adjusted for inflation, fighting COVID in one year than we spent fighting World War II over four years. It's just, the numbers are hard to wrap your head around, how big the policy response has been in the last year. And again, during the GFC in 2008, we in the United States spent about $800 billion. And now we're doing $2 or $3 trillion stimulus packages like it's nothing, that people don't even think about. So it's a completely different world.

James Bristow: If I sort of step back though and relate this to, what did we do and what would an individual investor do at that time, and what it's good to learn from all this? It comes back to, what is the old cliche of really having a plan?

Caption: Have a plan in place before crisis hits

That the plan for us as professional investors was, there are so many great individual companies out there whose stocks have had very significant drawdowns. Let's go through that list and see which we think are just cyclically impaired and which are more structurally impaired, and there are bargains to be had. But our plan for any drawdown always involves doing that. And for the individual investor, maybe that plan doesn't come at a stock-specific level, but it comes at the level of, how would I allocate my assets? What level of risk would I be comfortable with? So it just reinforces that fact for all of us, whether individual professional investor, to have a forward-looking plan of, here's what I'm trying to achieve, and here's what I would do in certain circumstances. And we had a great road test of that last year.

Morgan Housel: I think there's a weird thing during these crises where, when the future is the most uncertain, when you're in the midst of the deepest uncertainty, there are a lot of people who become the most certain about their views during that time.

Caption: People become most certain in their views in times of uncertainty

So you're right, that if we go back to last spring, there were people who were completely dead set on, this is what the future is going to look like. Usually in a negative way. People aren’t going to fly again, people aren’t going to go to concerts again. I just think it's an interesting quirk of behavior in these moments when you're in the trenches. That when the future is the most uncertain, that's when people lock onto their views and grab onto them really tightly.

James Bristow: You talked in a recent blog post about pandemic learnings. And you sort of highlighted three of them. The aspect of what people aren't talking about, the fact that the very concept of exponential growth is not particularly intuitive, and then I think you're surprised at how quickly businesses adapted to this new environment. Just interested which of those you'd really pull out as something that really struck you as a lesson from the pandemic and its aftermath to this point.

Morgan Housel: Yeah, I think the biggest that really struck me, and this is something that I had written about before COVID, but it just became so clear how powerful this concept is, is that risk is what you don't see. And risk is what people aren't talking about. To me, I just think it's astounding that we, in the investing field through no fault of our own, spent a decade discussing the question, what is the biggest economic risk? That's the question that takes up all the oxygen in the field. And by and large, we talked about things like interest rates, and trade wars, and profit margins, and tax cuts, et cetera, those kind of topics. And then a virus comes and 30 million people lose their jobs in two months. Like it's, in order of magnitude, greater than the risk that we had been discussing for the last decade. And I think if you look historically, it's always like that.

Caption: The biggest risks are those we don’t see

That the biggest risk that moves the needle the most are the surprises. And I think that will always be the case. And that might be disheartening for people to hear, that like the biggest risk is what no one's talking about, but I think that's just the reality of how the world works. Because if something is a surprise, people aren't prepared for it. And if they're not prepared for it, its damage is just amplified and magnified when it arrives. So September 11th terrorist attacks, COVID-19, Pearl Harbor, or these kinds of things, that's what makes the biggest difference over your investing lifetime.

And I think just becoming more comfortable with that mindset, that forecasting is great, planning is great, having plans is absolutely essential, but the biggest news stories of the next year, of the next 10 years, over the course of the rest of our investing lives are going to be things that you and I, and anyone else, cannot be discussing right now, because they're going to be surprises. And to me that just kind of pushes room for error in your investing strategy and in your asset allocation

Ben Graham has this great quote where he said, “The purpose of the margin of safety is to render the forecast unnecessary.” And I think that's so powerful for investing and financial planning. That if you have room for error in your analysis, in your allocations, in your budgets, you don't necessarily need to know exactly what's going to happen next.

Caption: A sound strategy should leave room for error

You can just kind of ride the waves as they come. And that to me, I think is a better way to think about and manage risk, and just a more realistic way to manage risk, than assuming that we know exactly what's going to happen next.

Carrie King: James and Morgan covered a lot of ground. One concept that stood out to me: Have a plan before crisis strikes.

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This can help you to better weather the market’s ups and downs, without letting your emotions lead you astray.

We hope you’ll tune into Part 2 of our behavioral finance series where James and Morgan dig deeper into the role of emotions in investment decision-making.


This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of Aug. 11, 2021, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the viewer/reader.

Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Investing involves risks, including possible loss of principal. International investing involves additional risks including, but not limited to, those related to currency fluctuations, illiquidity and volatility. These risks may be heightened for investments in emerging markets. This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.

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Expert to Expert: Behaving your way to investment success

Investing can be as much an emotional as an intellectual pursuit. BlackRock Fundamental Equities investor James Bristow and behavioral finance expert Morgan Housel discuss how to navigate the two.

About BlackRock in the U.S.

BlackRock is one of the world’s leading providers of investment, advisory and risk management solutions. We are a fiduciary to our clients. We’re investing for the future on behalf of our clients, inspiring our employees, and supporting our local communities. Watch the video to learn more.