Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 482

Fighting the last war

In November 1918, France was physically and mentally scarred. World War One was ending, yet the victory had come at an enormous cost. Of the 8 million Frenchmen mobilized, more than a million had died and another million were crippled. Eastern France had been almost continuously occupied by enemy forces for four years. Consequently, the country’s most advanced agricultural and industrial areas were devastated.

A big question emerged after the war: how could France best defend itself against future attack? The question took on greater urgency after the signing of the Treaty of Versailles in 1919. The treaty punished and crippled the war’s aggressor, Germany, yet France believed that the Germans had gotten off lightly and war would resume soon enough.

A safe France

After a decade-long debate, a key pillar of French defence against future attack was decided. It became known as The Maginot Line. The idea came from fortifications around Verdun which had worked well during World War One. They had held up to extensive artillery fire and suffered minimal damage.

The Maginot Line would be an extended series of large-scale buildings along the south-eastern French border. It would defend the region most vulnerable to attack. With the south-east fortified, France could focus on gathering forces in the north-east of the country, to get ready to enter, and fight in, neighbouring Belgium. Belgium was a key ally of France in 1930, when the building of the Maginot Line commenced.

Not as safe as assumed

France largely completed construction of the Maginot Line (pictured below) by 1936 and the country felt safe. After all, what worked in World War One had been extended and would shield the country from future attacks.

There was one problem: Germany didn’t end up attacking France via the Maginot Line. In 1940, it attacked the Netherlands, then moved through Belgium, to enter France. Germany met little resistance and France was subjected to a quick and embarrassing conquest.

After World War Two, the Maginot Line came under severe criticism both in France and abroad. In hindsight, it’s easy to pick flaws with the idea. At the time though, France thought it was learning from the recent past and applying that knowledge to the future.

Recency bias

Investors often make the same mistake that undid France. Behavioural economists call it recency or extrapolation bias. It’s a cognitive bias, or mental mistake, where investors incorrectly believe that recent events will happen again soon. Put another way, investors often overweight new events or information without looking into the objective probabilities of those events occurring in the long run.

Think of last year’s bubble price action in the likes of Bitcoin and GameStop, and how investors (or more aptly, speculators) thought the huge increases in prices for these things would continue without looking objectively at the long-term fundamentals.

To avoid the fate of France and indeed Bitcoin and GameStop speculators, it’s worth looking at recent events which investors may need to be careful extrapolating or overweighting into the future. They include:

  • Rising interest rates though everyone expects them to remain relatively low.
  • A pullback in bond prices making them attractive versus recent history.
  • The traditional 60:40 equities/bond portfolio failing miserably this year, with calls for it to be adjusted or discarded.
  • The US$ becoming ‘king dollar’ and the pound, Euro and Yen getting pulverised.
  • Growth stocks coming back and being set for further outperformance given their superior performance since 2008.
  • Most Australian superannuation funds having outperformed their benchmarks, with expectations of more to come.
  • Venture capital and private equity continuing their ascent in the finance industry.
  • Significant government debt having not been an issue (until very recently).
  • Gold being one of the few assets to have performed well in A$ terms this year, with predictions of further outperformance going forward.
  • Volatility being back. Period.

Building a durable portfolio

How can investors reduce the likelihood of them applying recency bias to their portfolios? Perhaps it’s moving in the opposing direction? Instead of overweighting recent events; underweighting them. Instead of investing in what’s worked for the past decade; investing in what hasn’t worked.

For example, since investing in growth stocks has worked since 2008, one should take the opposite tack and invest in value stocks. The trend in growth to value has ebbed and flowed throughout history and value could make a comeback.

The problem with this contrarian approach is that though many things in markets do mean revert, they often take longer than investors think. Or they may never mean revert, as a new event may prove enduring rather than fleeting.

Instead, the best strategy for investors may be a more balanced one: to be aware of mental biases such as recency bias and build a portfolio which is neither overweight nor underweight recent events. In other words, constructing a durable portfolio of investments which will perform under most, if not all, future circumstances.

 

James Gruber is an Assistant Editor at Firstlinks and Morningstar.

 

1 Comments
R S Gupta
November 08, 2022

Very good way to invest in durable portfolio

 

Leave a Comment:

RELATED ARTICLES

Investing is like water, but what the hell is water?

10 cognitive biases that can lead to investment mistakes (Part 2)

10 cognitive biases that can lead to investment mistakes (part 1)

banner

Most viewed in recent weeks

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

Retirement is a risky business for most people

While encouraging people to draw down on their accumulated wealth in retirement might be good public policy, several million retirees disagree because they are purposefully conserving that capital. It’s time for a different approach.

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Reform overdue for family home CGT exemption

The capital gains tax main residence exemption is no longer 'fit for purpose', due to its inequities, inefficiency, and complexity. Here are several suggestions for adapting or curtailing the concession.

So, we are not spending our super balances. So what!

A Grattan Institute report suggests lifetime annuities as a solution to people not spending their super balances. The issue is whether underspending is the real problem or a sign of more fundamental failings in our retirement system.

Latest Updates

Shares

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

Superannuation

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Shares

The naysayers may be wrong again on the Big Four banks

While much of the investment industry recommends selling the banks, many were saying the same thing 12 months ago. The reporting season shows why bank shareholders should be rewarded for ignoring the current market noise.

Superannuation

Unpacking investment risk in superannuation

Understanding investment risk in superannuation is crucial for your retirement account. Here's a guide on how to define, take, and manage risk to select the right investment mix tailored to your unique circumstances.

Economy

This 'forgotten' inflation indicator signals better times ahead

Money supply provides an early and good read on whether the cash rate setting is transmitting to accelerating, steady or slowing price pressures. This explores recent data on money supply and what lies ahead for inflation.  

Investment strategies

The biggest and most ignored catalyst for emerging market stocks

Relative valuations and superior GDP growth alone are not compelling enough reasons for an improvement in emerging market equity returns. Earnings growth looks more likely to revive the asset class’s strong long-term record.

Property

Has Australian commercial property bottomed?

Commercial property took a beating in recent years as markets adjusted to higher interest rates. From here, strong demand tailwinds and a sharp fall in fresh supply could support solid returns for the best assets.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.