The sky is not falling

Only one animal, Foxy Loxy, had the ‘moxie’ not to believe everything he was told. Foxy Loxy used the hysteria to his advantage.

The sky did not fall, and, like most foxes in children’s tales, Foxy Loxy was not a vegetarian, and he and his family enjoyed a poultry buffet.

Foxy Loxy’s moxie can teach us about investing.

Foxy Loxy wasn’t trying to time the market nor constantly expecting the worst. Rather, Foxy Loxy continued to do what foxes are known for – being cunning and patient.

A cunning investor remains invested, having built their portfolio to withstand shocks and deviations. Foxy Loxy’s portfolio would be well diversified by geography, stock and sector. A diversified portfolio allows investors to share in the upside while limiting the downside.

A patient investor does not panic. Chicken Licken’s reaction to a falling acorn was disproportionate to the actual threat. For every market movement that is not favourable, there will likely be someone eager to write a story that is equivalent to “the sky is falling”.

So how did Foxy Loxy become cunning and patient? We have a few ideas.

Cunning investors

Cunning investors know their limitations as humans. Humans are terrible at estimating and imagining large numbers. Foxy Loxy knows two mistakes to avoid in uncertain times.

1 – Availability bias- Availability is the decision-making process of assigning the likelihood of an outcome by the ease with which instances can be remembered. This leads to biases, often resulting in overestimation of the likelihood of occurrence.

Recent occurrences, too, are likely to be more readily remembered and therefore will increase the estimation of occurrence (recency bias). Furthermore, the impact of an experience will influence decisions. For example, the impact of seeing (or even hearing about) a shark attack will have an impact on your assessment of the probability of a shark attack.

Foxy Loxy considered more than the acorn falling on Chicken Licken’s head, just like cunning investors should consider more than the headlines about the trillions of dollars of value being wiped from the value of share markets.

2 – Bad estimating (Adjustment and anchoring)

Humans have difficulty estimating, and this difficulty is exacerbated with large numbers. We cannot be expected to comprehend the impact of a ten-trillion-dollar loss quickly. But that is what we were expected to do last week. One headline read Recession fears mount as tariffs wipe $10.8 trillion off Wall Street.

To assess this as a percentage of the share market, you would have to know the entire size of “Wall Street”. Not a figure many know off the top of their head, so they must estimate that too. According to Siblis Research, as at the end of 31 December 2024, the figure was US$62.2 trillion (representing the total market capitalisation of public US companies). Note, that’s in US dollars. Our headline was in Australian dollars, for Australian readers. Using the exchange rate at the time, that would make the US market capitalisation $101 trillion.

Let’s consider the headline again. The market had lost less than 10%. Likely, you may have overestimated the impact, because the starting point you were given ($10 trillion) was so high. For perspective, this fall is much less than the US share market gained in 2024. Now, how would that erosion of wealth flow through to the multi-trillion-dollar US economy and influence a recession? Good luck estimating that!

Rather than guess, Foxy Loxy is well diversified. Foxy Loxy’s portfolio is probably a good mix of uncorrelated asset classes. Foxy Loxy uses ETFs.

ETFs allow investors to access different asset classes, from equities to bonds, from private equity to gold bullion. ETFs help all types of investors to invest like the largest institutions, such as Australia’s own Future Fund. Institutions are known to invest for the long term.

Patience

Successful long-term investors survive through the economic cycle by sticking to investment principles that have withstood the tests of time, even if, for a short time, it can present some bumps.

For portfolios, this may include better diversification. For equities, investing in profitable companies with strong balance sheets and stable earnings has historically given resilience to portfolios. A financial adviser can help navigate and counsel through uncertain times to help you achieve your financial goals.

Perhaps like Foxy Loxy, you can use hysteria to your advantage. Market falls are common and are a part of a normal cycle. Since 1928, bear markets have tended to be short-lived, with the average length being 289 days or just over 9.5 months. While bull markets are much longer, averaging 991 days or 33 months (data based on S&P 500 since 1928). As evidenced by the rise of the share market since 1928, bear markets return more on average than bull markets fall (114% versus 36%).

The question of reaching a trough or a peak is a perpetual one, and no investor (or fox) has ever picked either. The types of markets we are in, however, can present opportunities. Be watchful. A new wave of opportunities will present themselves, and smart money anticipates this. Emotive sellers make for good buying. Anticipating the irrational fear that economic weakness can instil has historically been the platform for long-term wealth creation.

If you invest like Foxy Loxy, are well diversified and focus on the long term, you don’t need to be concerned by a single acorn falling.

Foxy Loxy will remain invested, looking for opportunities, because he knows that trying to time the market is a game for the Chicken Licken’s of the world, and they rarely get it right.

Better to have moxie.