July 13, 2020
In the horse racing business “blinkers,” or “blinders,” are an important piece of horse tack that prevents the horse from seeing to the rear and side. Unlike humans, horses have a much wider peripheral field of vision allowing them to see not only in front and on their sides, but also as far back as their hind legs. This physical attribute was important for survival in the wild but, as race horses, it can impede their racing success.
Blinders limit the horse’s peripheral vision and keeps the racing horse’s attention on the track ahead. Many racehorse trainers equip their more highly-strung horses with blinders to help shut out distractions such as the crowd, the noise, or another horse approaching from the rear. Trainers believe blinders can result in a better race outcome. Next time you watch the Derby, or the Preakness, make note of how many horses are wearing blinders.
An investor equivalent of horse blinders could be useful in today’s chaotic investing market. Most institutional investors are looking through the economic challenges associated with the pandemic and predicting a corporate earnings recovery that begins later this year and fully recovers in 2021. Investors with this view are looking beyond today and focused on the world in full recovery. Perhaps this view parallels the tightrope walker slowly walking across a dangerous canyon with a fast river far below. I have never walked a tightrope, but I imagine the walker is most focused on balance and careful footing one step at a time while also being mindful of reaching the other side. There is great risk in falling but great reward in making the crossing.
During this pandemic generated economic downturn it is tempting to imagine the other side where normal footing and safety return. Such a safe place would include low interest rates, low unemployment, steady corporate earnings growth and an accommodating Fed. Who wouldn’t be excited about this outcome? Yet, a second surge in the virus that puts us back to where we were economically in the spring could be crippling for many companies. More government stimulus would exacerbate the high level of Federal debt and could spark a decline in the value of the US dollar. Such changes would disprove any assumptions investors had made about future corporate earnings and dampen their enthusiasm for buying stocks. Stock values would quickly be affected by any re-evaluation of the earnings outlook. Since the March 23rd low, the market seems to have paid little attention to the warning signals and downside risk scenarios and have been focused instead on the recovery at the other side of the tightrope.
Perhaps horse blinders should be issued as an essential tool for the long-term investor who believes in America’s future and its ability to reinvent itself even in the most challenging circumstances. Here’s to next year’s Kentucky Derby, and the benefits of blinders.
Gary B. Martin