Six lessons investors can take away from 2020

The year 2020 is drawing to a close. It will go down in the history books as one of the saddest years in decades. 75 million people were infected with the Corona virus, some of them suffering from serious late effects. Over 1.7 million people lost their lives as a result of the Covid 19 pandemic. Behind every death there were indescribable human tragedies.

But the virus also had an impact on other areas of life. Above all on global economic performance, which collapsed this year despite support. But the world of work and the lives of every individual also changed. Technological trends were intensified, the triumphal march of digital products and services progressed.

The virus also affected politics. Disagreements over fighting against the corona virus and general policy directions were exposed and amplified via the leverage of social media. Political divisions increased, as demonstrated not only by the US presidential election.

In stark contrast, 2020 saw developments in the financial markets. The credit markets were pricing in an ideal world, as were the equity markets. In 2020, the MSCI World Index gained 15 per cent, the DAX gained 4 per cent, and the Nasdaq-100 soared 46 per cent. There is no sign of the sharp crisis from March 2020 at the turn of 2020/21, on the contrary.

The markets were helped by the fiscal stimuli of the states, which reacted quickly and replaced income losses for companies and workers in order to avoid mass unemployment. The very aggressive liquidity injections by the central banks had an even stronger effect. These also reached record dimensions, stabilised credit markets and supported share prices.

At the end of the year, we often receive questions about what lessons investors can take away from the events of 2020.

This is a question that every reader should basically answer for themselves. The best way to do this is to analyse what went wrong in one's own portfolio in 2020.

We ourselves think that the following points are important:

1. the stock market is not the economy (but it is close)

The companies in the major stock indices have been more successful in the past than the "normal" companies in a country, otherwise they would not have grown so strongly and been represented in the indices. Moreover, share prices are influenced by many factors (market sentiment, investor behaviour, liquidity, interest rate development, availability of investment alternatives, political influences) to which companies are hardly subject outside the stock market.

2. companies can adapt quickly to difficult situations

Most companies have constant change firmly embedded in their DNA. As early as 2021/2022, the profits of DAX companies should be able to reach their old highs again. The strong companies put pressure on weak competitors during the crisis and become more profitable. Disproportionate profit increases at individual groups are conceivable if costs have been cut in 2020.

3. the support measures for the markets and the economy seem unlimited

The huge amounts of liquidity provided by the central banks act on the stock markets like a broad marketing campaign for so-called "risk assets" such as gold, bitcoin and equities. Without the low interest rates, many companies and countries would no longer be able to bear the interest burden and would be at risk of default.

4. in hindsight everything has always been obvious

2020 felt like a year in which investors could either earn 10 per cent on blue chips or 300 per cent on US tech stocks. Investors who belonged to the first category should not mourn the price gains of the others. These were not predictable.

5. there has never been a year without a crisis in the financial markets

As harrowing as the Corona year 2020 was: In recent decades there has not been a single year without a crisis in the financial markets. Cold War, 9/11 or Brexit crisis: In fact, however, share prices have risen fairly consistently during this period, with seven to nine percent price gains per year.

6. diversify your portfolio, pay attention to good companies, don't sell in panic. This will also bring success in the future

Investors who sold their portfolio positions during the price low in March would have missed a good investment year. However, with a focus on several good companies in the portfolio, a long time horizon and a lot of composure, many supposed problems can be avoided.

Christian Kahler


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