What's Going On?

On Sunday, I was having lunch with my parents, who are both in their seventies, when they suddenly told me they were worried about my savings. For a bit of context, my mum is a lovely woman with no financial literacy whatsoever. Even though she reads YAIN, she still quietly believes that stock picking is basically gambling. In fact, she mentioned  that one of her friends had lost a lot of money this week and she was genuinely concerned about my financial life. Similarly, my dad, also a YAINer, told me that he should have sold when prices were high. So let me be clear: Trump has disrupted the global economy to such a degree that even people with no interest in financial markets have somehow become aware of how many trillions of dollars vanish each day.

Unless you have been kidnapped and held prisoner in a cave for the past few weeks, chances are that you already know what happened: tariffs. Tariffs are essentially taxes that must be paid to purchase a foreign product. In this context, that means an American resident buying imported goods. Put simply, the current administration believes that tariffs will make foreign products more expensive than domestic ones. This should push consumers toward buying locally made goods, which in theory should give a boost to the domestic economy. However, the markets are not convinced. Neither are most people who have studied even a little economics, whether in a classroom or through a quick video on YouTube. 

Consider a car, for example. It is a final product made from many other components, some of which are manufactured outside the United States. Every time one of those components crosses a border, a tariff is applied. This increases the cost at each step, which can result in American-made products becoming more expensive too. (see figure below). And this is only one of many reasons why markets believe tariffs are likely to backfire. They not only make life harder for the historical allies of the United States who now face new trade barriers, but they may also end up hurting the United States itself.

We will not revisit some of the more absurd consequences of President Trump’s reciprocal tariffs here. That said, a quick mention of either the penguins or the method used to calculate these tariffs still deserves some attention. For those curious, the relevant links are here and here in case you missed them. The last news is that tariffs have been mostly paused for 90 days, which created a small joy in the markets. We will never know whether the current administration really believed that tariffs were a good thing or they were using them as negotiating leverage: truth is, we don’t care.

In fact, why are we commenting on headlines rather than focusing on our training plan? Because there is no better time to discuss the psychological side of investing. When markets drop sharply and red dominates trading screens, even seasoned investors feel a deep sense of discomfort. The recent consecutive days with declines of more than four percent in the S&P 500 are worth noting. This kind of movement has happened only a handful of times over the past fifty years, so it is no surprise that many are feeling anxious or uncertain. In times like this, sensational headlines often overshadow underlying economic realities. This is precisely when long-term investors must maintain a clear perspective and avoid reacting out of fear.

When in panic, remember that If you had invested $100 in the S&P 500 in the year 1900 and simply held on, by the year 2000 your investment would have grown to over $150,000, assuming dividends were reinvested. Even across two world wars, multiple recessions, and geopolitical upheavals, the market rewarded patient investors.

The chart above highlights every moment when investors may have felt tempted to liquidate their entire portfolios due to seemingly catastrophic global events. Despite the fear, the world did not end. Even after severe corrections, the US stock market eventually resumed its upward trajectory.

Is this time different? The current administration seems to be determined to reshape the geopolitical order as well as redefine free trade. That said, we don’t know and we don’t care as long as the companies we invest in keep on making money, growing their free cash flow, and maintain a high return on capital employed. In fact, companies are assets. Unless there is a fundamental issue with the underlying business, a drop in stock price simply means the asset is now available at a discount. You are paying less for something that yesterday was of equal quality but higher cost. Of course, very few companies are completely immune to today’s challenges, which helps explain the current market decline.

What do we do then? Remember the Kelly & Thorpe example discussed in YAIN Investment Philosophy? The first and most important thing to do in these circumstances is understand whether the new circumstances will create some existential threat to the businesses we like. As long as the probability of default is under control, we don’t care about volatility. We then re-assess our thesis: in this case, could new tariffs, if made permanent, meaningfully affect margins, growth, or long-term profitability? It is worth remembering that such policies may be reversed quickly, especially if they are being used as negotiation tools. In a less US centric world,our focus on global companies, often midsized and less exposed to the US, may work to our advantage.

If a company continues to meet our quality standards, we view the current environment as a rare opportunity. We look to increase our exposure to businesses we understand and trust. In practice, this means buying more shares as prices decline, with the aim of benefiting from future price recovery once the global situation finds a new balance.