In Time’s Arrow – a mind-bending novel by Martin Amis – time runs backwards.
Everything that happens proceeds from what we’d consider the future into the past, and the novel’s protagonist struggles to make sense of it all.
- Doctors harm their patients, who walk into hospitals healthy and leave sick and injured
- Burglars are saints who secretly distribute their wealth via broken doors and windows
- Most people become conscious as befuddled pensioners, then experience their last day at the office, a slide down the corporate ladder, and finally school
- Rather than dying, people become babies reunited with their mothers
Bonkers, sure. Yet from a certain perspective Amis’ fantasy world makes more sense than ours.
We constantly prepare ourselves for days to come we know nothing about.
Whereas in Time’s Arrow the hero muses:
“How many times have I asked myself: when is the world going to start making sense? Yet the answer is out there. It is rushing towards me over the uneven ground.”
In Time’s Arrow, life is a punchline where you wait for the delivery.
Whereas as Apple founder Steve Jobs said of our lives:
“You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future.”
The stock market can also seem like an alternate reality.
For instance, shares may go up even when things in the real world look bleakest.
The 2020 market rally as the pandemic unfolded was a textbook example.
After nosediving on fears about the new coronavirus, shares promptly reversed course and soared – before lockdowns had barely begun beyond China, and ahead of two years of stop-start economic growth and millions of lives lost.
To the uninitiated, investors were acting like the crazed members of a death cult.
But one of the most important things to grasp about the stock market is it looks forward.
A share price rarely represents what’s happening this instant.
Rather investors peer months – years – ahead to guess how things will be, and to estimate the future earnings of a company.
Working backwards, this enables them to estimate a fair price to pay today. Regardless of the headlines.
Prices rallied in 2020 because the market had sniffed out the limits of the pandemic’s destructive power, as well as being reassured by the actions of central bankers and politicians.
The world was not ending. Life and business would continue. Companies were still worth owning.
Indeed with the benefit of hindsight it went too far.
Some investors priced in a forever where we always worked and shopped online and barely went to a restaurant. One where super-low emergency interest rates never rose again.
But in 2022 we’ve subbed out Zoom for the commute, and chosen holidays over Amazon binges.
Interest rates have risen, as inflation returned in force.
Frothy share prices have crashed back to reality accordingly.
A shot in the dark
So the market looks forward to the future. But it doesn’t know the future.
In that gap lies the uncertainty and risk of investing.
In fact it’s not even clear it’d be easy to profit if you knew exactly how events will unfold.
Imagine you were in a fairground tent in 1999 peering into the only working crystal ball this side of The Lord of the Rings.
A suspiciously impoverished fortune teller says you’re seeing 2022. You both gaze in wonder – just like the people you see through the mists of time gazing into their smartphones and computer screens.
The techno-prophets are right! The Internet really will takeover the world!
You sprint home to buy shares in all the technology stocks you can.
Although this being 1999, you must wait for your dial-up modem to connect you to your sort-of-cheap broker, then pay extra because you’re buying US tech firms…
But never mind. You’ve seen and own the future!
Yet over the next three years the Nasdaq tech index will fall more than 75% from its peak – and many of your Dotcom stocks go bust.
Crystal balls indeed.
Stay on target
More recently, imagine you knew in 2016 that Donald Trump would become US president.
Pundits predicted four years of political chaos and a stock market crash if the outsider won.
We saw the chaos. Yet equities rose during most of the Trump presidency.
The difficulty of both predicting and pricing in the future is why we focus on individual company fundamentals at The Motley Fool.
It doesn’t solve everything. You can still be wrong about a firm’s prospects.
And if everyone sees the same bright future then it’s easy to overpay.
But by avoiding politics, macroeconomics, or even the outcome of a pandemic, we can better restrict our forecasting to things that management can actually control.
These executives are surely no better than us at predicting interest rates or election winners. But the best can spot and back promising new products or services that will do well regardless of what happens, and swiftly trim payroll if the economy turns south.
My aim is true
At least we can count ourselves luckier than Fools in the alternate universe of Time’s Arrow.
True, as time flows backwards, they’ve already seen the future.
But what good does it do them?
In their reality, the global economy gets ever-smaller, profits dwindle, and share prices shrink.
Their long-term market graph starts high and to the right, and slowly retreats lower to the left.
But back in our real world, we’ve seen decades of economic growth drive productivity, living standards – and ultimately the markets – higher.
Indeed over the last 122 years, global equities have delivered an annualised real return of 5.3% (in dollar terms) compared to just 2% for bonds and less than 1% for cash.
It’s not always smooth. And it’s rarely easy. But trusting in the future has seen the best returns go to equity owners willing to put up with not knowing exactly how it will unfold.