23 June 2023

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Unlocking the distinction between knowledge and know-how

Luigi Campopiano

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After a decade of market growth, there have been some changes due to several reasons, including:

• The COVID-19 pandemic
• The Russia-Ukraine conflict
• Inflation, and
• Recession.

Decisions will still be made, and reactions will be a logical consequence. We find ourselves in a new financial world where the same old basic rules apply and where investors' reactions are always the same. This means that emotions spiral into illogical, uncontrolled and irrational thoughts.

After a decade of stock market growth, during which we have experienced and overcome several crises, we still find ourselves doubting our certainties, choices and doubts, despite all the crises we can recall throughout world history.

Why should investors ever learn from their mistakes? In the crisis we are experiencing today, many young savers have never heard the word "inflation," while more experienced savers do not remember the 1970s.

How should we behave, manage our savings and make choices? 

We know very well what to do because our advisors keep telling us, but wanting to do it is a different matter. Doing what they say could be complicated without a reference to shared solutions and methods to profit from this situation. Knowing doesn't mean knowing how.

Understanding inflation in everyday life is not easy at first glance. It is difficult to grasp that, by opening our wallet and finding the same amount of money, we can afford a lower standard of living. 

Dealing with the volatility of our investments — perceived only when it contributes to reducing their value — is the final step to being promoted to the role of an investor. That same volatility has led global stock indices, with a natural intermittent rhythm, to reach new inexorable highs.

For every action, there is a reaction, as the saying goes. 

If interest rates rise while we chase the latest government bond issue, with a gross coupon that could currently be one-fifth of inflation, we must be aware that all our bond investments will contract. It would not be logical for the markets to value a government bond issued years ago at negative rates, as if the increase in rates had not materialized. 

Rising rates mean more expensive loans and mortgages, a rising cost of living and a stable income incapable of remedying the situation.

Preferring the bond component with percentages approaching 80% in long-term portfolios means not even matching the cost of living. As investors, we have a challenging but not impossible task: it will not be the market's performance that determines the return on our investments, but rather the synthesis of the choices we make every day, which will bear fruit in the years to come. 

Knowing doesn't mean knowing how: what separates sowing from reaping will always be a matter of choices, time, method and discipline pursued with tedious perseverance. It is precisely when we think we know and understand everything that we must go back to studying again.