We prune roses to maintain the shape of the bush, to keep the main branches to a manageable height, and to eliminate unsightly, superfluous deadwood. Pruning encourages strong new growth and reduces the number of flowering stems, resulting in an increase in eventual flower size.
Similarly, in nature most fynbos species are fire-dependent, in that they require bush fires to complete their life cycle. Bush fires are incredibly complex and are affected by a large number of factors, such as how land is used and managed; the introduction of unnatural fuels like invasive alien species; and urbanisation that is altering the land cover. In a perfect world – one without humans, perhaps – bush fires are a wonderful thing. They clear out the old, bring in the new, and create space for fresh growth.
Human nature is equally complex and dynamic, causing valuations of financial products to be unpredictable and volatile over the shorter term. Just like in nature, we need periodic adjustments that can be severe and painful, but necessary to get valuations back in line. Most people expected shares and bonds to lose some steam after the exceptional year they had in 2021, but the consensus expectation was not for markets to go down between 20% and 30%. Although it hurts, we have to remember that we are merely back to levels we were at about twelve months ago.
The longer-term thesis still stands: that shares in quality companies will outperform any other asset class over time; and that is why you should simply continue your regular equity investments. Most market commentators are not worth listening to, because they simply repeat whatever happens to be the prevailing market narrative at the time.
Like all really knowledgeable investors, Warren Buffett is buying billions of dollars’ worth of shares at the moment because he has seen these deep drawdowns before. It is true that the current market decline is worse that expected and we do not know when it will stop, but we have seen this before and we will see it again. This is a time where you have to accept that some of the money you made last year has been lost, but if you are patient you will see it return in years to come.