Navigating the Current Uncertainty

April 2025

Jeffrey S.D. Tory, CFA
Chair, Partner, Director, Portfolio Manager

 

The events of the past few weeks have been unsettling for even the most seasoned investors. Let’s face it, humans and markets hate uncertainty and, at the moment, there is a lot of uncertainty. This is my 43^rd year of investing in the public markets. I have been both a participant and an observer of the various crises and bear markets during that time. The 2008-09 period was probably the most stressful because there was a time when the survival of the financial system was in question. I do not think this is one of those moments. Liquidity is available, credit markets are functioning, and leverage is not a threat. Most of the time the world does not end.

While the drawdowns are painful (more on this later), the markets were probably vulnerable to a change in sentiment due to the unbridled bullishness of the past two years and the high valuations (some would say exuberance) in parts of the market. The most surprising part of the current turmoil is that it is being precipitated by the untested trade policies of a supposedly pro-business U.S. government.

It would be naïve to think there will not be some fallout from even a diluted version of the current plan. The proposed tariffs may achieve some of the desired goals, but could also trigger other unintended consequences, such as a recession or inflation. At a minimum, the growth trajectory of corporate earnings will moderate, and consumers and investors will be more cautious as we adjust to the new paradigm.

WHAT SHOULD INVESTORS DO?

In the current environment, the big question for most investors is what should we do? As I reflect on investing in times of uncertainty, I realize that it is faith in a good investment process that allows our team to navigate the emotional challenges of volatility. Well-financed, quality companies run by aligned management will adapt, rebase and continue to compound their earnings and book value.

In our experience, our companies often do their best work during these periods, as their financial strength allows them to go on the offensive. It is also during these times that the astute investor takes advantage of the emotional “Mr. Market” to buy more of the best companies in the portfolio or companies from the wish list.

It is hard to fight the urge to panic when our Bloomberg screens are a “sea of red,” but this is where adherence to a quality investment process should kick in. I will admit the share price gyrations are disquieting even for professionals. However, I constantly remind myself that the business values do not change as fast as the stock prices. It is simple: in the long term, stock prices will largely reflect the progress companies make in growing their earnings or cash flow. The rest is just noise!

THE ROLE OF PSYCHOLOGY

Why is disciplined investing so hard for the average investor…and professional? Unfortunately, we are hardwired to struggle in volatile markets. When prices fall enough, most investors stop doing real analysis and the stock prices become the narrative. In fact, the same is true in bull markets.

In his great book, Your Money & Your Brain Jason Zweig explores the biology of our irrationality. In a series of photos of brain activity, he shows why evolution and biology conspire to degrade our decision-making abilities.

1. In bear markets, it is our amygdala, the primitive part of our brains that lights up and triggers our “fight or flight” survival instincts (why we panic when our portfolios fall and we sell at the bottom).
2. In bull markets, it is the dopamine driven pleasure centre of the brain that lights up in response to rising stock prices (similar to our brain’s response to gambling, sex and drugs). Of course, this is what inspires us to chase fads and invest at the top of the market!

A LESS EFFICIENT MARKET

Another major force at work in the markets that poses a challenge for long-term investors is the ever-shorter time horizon of many of the market participants. In a recent paper entitled The Less Efficient Market Hypothesis, author and famed investor Cliff Asness argues that in the short-term markets have become completely inefficient for the following reasons:

• 24/7 news media distracts investors from a long-term focus,
• frictionless trading promotes more of a casino, gambling mentality,
• social media creates a need for instant gratification and recognition (see number two above),
• there is less price discovery and fundamental analysis because of high-speed trading and the rise of indexing.

While these factors are working against many investors, they create an advantage for a balanced, informed investment organization. The short-term volatility in stock prices surfaces many opportunities in the two to five-year time frame, which is where a long-term investor should focus.

CALM AND COMMON SENSE

I wrote this memo on the plane ride back from a conference where I listened to several leading investors from around the world. They all stressed the importance of discipline and process. They also, to a person, stressed the importance of investing in quality companies with solid finances as safeguards in a period of uncertainty. Their calm in the face of the turmoil was actually very reassuring. Like these investors, we have a time-tested process at Pembroke, a process that was built for times like these.

There was also a common refrain that it is very hard to predict what the outcome will be. In the end, we have to believe as investors that common sense should prevail, and the government leaders will find an acceptable compromise. The reality is that in the words of renowned investor Howard Marks, “Nobody knows.” This is why investing in quality companies is key to getting through this period of uncertainty.

NAVIGATING UNCERTAINTY

Given the emotional challenges we face in these markets, I have reflected on some of the antidotes for market-induced anxiety.

1. Avoid over monitoring: Do not look at your portfolio every hour. It has been proven in the research lab that obsessive market watching actually makes us even more emotional and volatile.
2. Keep perspective: Adopt a broad frame when thinking about performance. Although 2025 has so far been challenging, 2023 and 2024 were very good years for investors (regression to the mean is very powerful). However, history has shown that forward returns are often very good after periods of dislocation such as the current one.
3. Beware of distorted benchmarks: Do not compare your performance to the major indices, unless you are willing to have a large overweight in technology in the case of the U.S., or a significant exposure to gold equities in the case of Canada. Remember, during the tech boom of 1999–2000, Nortel grew to represent over 30% of the S&P/TSX Composite. A good portfolio manager would not have recommended such an asset allocation.
4. Do not make investment decisions when you are in an emotional state: It is always better to make decisions when we are calm.
5. Stay aligned with investors with a clear philosophy: Make sure your money is managed by investors who can articulate a clear investment philosophy and can apply a clear process in times of turmoil. It is also important that they have their own money in the same strategies as you.

FINAL THOUGHTS

Although investing in stocks can be a challenging at times, the stock market is an amazing generator of long-term wealth. If history is any guide, the current period of uncertainty will pass, and markets will adjust to the new economic reality. If we can continue to find “compounding machines” for you, in time this will all be forgotten. When we look at long-term, 25-year stock charts, drawdowns like the current one end up being small blips in a very rewarding process.

 

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