Brexit: Keep Calm And Carry On

Includes: FXB
by: Terrier Investing


Brexit became reality and that's okay.

This is probably an incremental negative for the European economy and potentially that of the U.S. as well.

However, the impact appears relatively limited and there are plenty of domestic companies with little to no first-order impact.

Data suggests that individual investors' attempts to time the market dramatically lower their long-term returns - so the prudent thing to do is stick to your long-term strategy.

So the Brexit happened. To say markets didn't like it would be understating things. As of the time of this writing, the pound is down nearly 10% under $1.36, American equities look set to open down 4-5%, while European equities may be down 9-10%.

What's an individual investor to do? I'm sure the always-witty Heisenberg will have some expert macro commentary. I'd offer a different perspective, which is: don't overthink it.

I've talked before about why sticking to a strategy you can execute consistently is preferable to trying to be everything to everyone. For me, that means accepting that I'll never be able to predict the exact impacts of macro events, and instead focusing on investing in companies who are well-positioned regardless - as Charlie Munger would say, "let the tide take care of itself."

What's The Big Deal?

Looking at things rationally, it appears that the majority of economists believe that the Brexit would have a modestly negative long-term impact to Britain's GDP, and in the short term would lead to a weaker EU economy. This latter factor, in combination with a stronger U.S. dollar, would further pressure U.S. exports to Europe and perhaps the world - and indeed, many of the industrial / "product" companies I follow have noted over the past year that foreign competitors are taking advantage of the already-strong dollar to win share overseas.

Even as a relatively macro-agnostic investor, I acknowledge that this certainly looks like an incremental negative, and makes me pleased with my current practice of largely avoiding companies whose demand is highly discretionary. However, while the headlines may be scary, the U.S. economic picture still seems pretty good.

Remember that there are plenty of industries - from homebuilding to niche growth technology to restaurants - whose immediate outlook is driven by factors completely unrelated to whether or not Britain is still in the EU. I'm not calling out any of those sectors as cheap or good places to invest - although I do actually have a holding in each sector - but rather, I'm just reminding you that if you take the time to calmly and rationally assess what's going on, you'll realize that the sun will still rise and people will still go to work and eat lunch and need a home to sleep in tomorrow.

Yes, you can talk about the "butterfly effect," but second-order impacts are notoriously tough to gauge (otherwise all the talking heads on TV would be on a beach somewhere.) Indeed, think back to all the other issues over the past half a decade that have caused market panic - Greece, the U.S. debt downgrade and so on. All of these turned out to be false alarms, and investors who liquidated and/or believed the permabears ended up losing out.

If You Think You Can Time The Market... Check Your Math

Multiple studies have clearly demonstrated that individual investors, in the aggregate, woefully underperform thanks to their attempts to time the market. That is to say, if the market (or their mutual funds) generates returns of X, individual investors usually generate returns of way less than X, since they try (and miserably fail) to time the market to enhance their gains.

Thus, the sensible thing to do is to not attempt to time the market. Whatever your long-term plan is, stick to it. If you invest in index funds, continue to dollar cost average and rebalance. If you invest in individual stocks, use the dip as an opportunity to purchase names whose fundamental prospects are largely unaffected by Brexit, while perhaps trimming more economically-sensitive names if that helps you sleep at night.

But don't panic. Britain isn't sinking into the ocean. The world functioned just fine for years when the EU didn't even exist, and it can function just fine without Britain in the EU. The media needs something to freak out about to drive viewership, but that doesn't mean you need to listen. Keep calm and carry on.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.