• Institutional "buy the dip" conditioning provides a powerful physical force against negative headlines
• Real economic impact lags; do not mistake initial price resilience for absent risk
• Prioritise very high quality stocks over geopolitical noise to ensure safety.

There is an old adage on the floor:

"The tape tells the truth, even when the news is lying."

We recently saw a perfect example of this.

The week began with a perfect storm of headlines that should have sent any rational observer reaching for the "sell" button.

• Ceasefire talks in the Persian Gulf collapsed (no surprise)
• The Strait of Hormuz – the world"s most vital energy artery – faced a blockade.
• Oil prices spiked back over $100.

On paper, this is a disaster.

Yet, the S&P 500 didn"t just hold its ground – it staged a solid rally.

By the time the dust settled, the market had erased almost all its "war losses" and is trading very close to its all time highs.

What risks you ask?

Is the market blind, or is it seeing something the headlines aren"t?

As long-term investors, we have to understand the forces that allow the tape to stay levitated when the world seems to be falling apart.

Below I will outline three:

Force 1: Pavlovian Response

Over the last decade or more, investors have been conditioned like Pavlov"s dogs.

Post 2008 – every time a "tail risk" event occurs – a pandemic, a regional conflict, or a banking hiccup – the playbook has been the same: buy the weakness.

This isn"t just mindless optimism.

Above is a 30-year chart for the S&P 500. It shows the Index averaging an 8.5% CAGR exclusive of 1% to 2% dividends (e.g., a total return averaging in the realm of ~10.5%).

Buying weakness has largely worked well if stocks are held over long periods of time (e.g., at least 3-4 years).

The tape ascent is largely the result of:

• Years of excessive fiscal largesse (debt and deficits); and
• Corporate earnings that have remained remarkably robust.

With respect to the latter – this chart shows the long-term growth in corporate profits vs nominal GDP.

Corporate profits have averaged a CAGR of ~7.6% over several decades – tracking the growth in nominal GDP.

Now when the MSCI All-World delivers $35 trillion in gains over three years, "buying the dip" ceases to be a strategy and becomes a reflex.

Therefore, we should ask ourselves:

What would have to happen for this reflex to finally fail?

If the market has been trained to ignore geopolitical shocks or pandemics because they"ve historically been "bought," the danger isn"t the shock itself – it"s the moment the liquidity behind that reflex finally dries up.

In that sense, pay more attention to what we see with liquidity (and credit risks) than oil prices.

Until then, the momentum of the bull is a physical force that bad news struggles to stop.

Force 2: The Supply Shock Lag

One of the most dangerous traps for an investor is recency bias – the idea that if an event hasn"t caused a crash in the first 48 hours, it won"t cause one at all.

Here I am reminded of Charlie Munger.

Charlie never used the term recency bias – but instead cataloged it under what he called the Availability-Misweighing Tendency.

"This mental tendency echoes the words of the song: "When I"m not near the girl I love, I love the girl I"m near." Man"s imperfect, limited-capacity brain easily drifts into working with what"s easily available to it"

To Munger, the human brain is like a "one-legged man in an ass-kicking contest" when it relies only on what is immediately visible or recent.

For example, he often explained that the mind is predisposed to reach a conclusion and then stop thinking.

He compared it to a biological mechanism:

"The human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can"t get in."

In the context of a supply shock or a geopolitical event, if the market"s first "conclusion" is that the world didn"t end on Tuesday, the brain "shuts the door" on the evidence that the structural damage might finally arrive on Friday.

Think of the "Wile E. Coyote" moment.

The coyote runs off the cliff, his legs keep spinning in mid-air, and for a few glorious seconds, he stays levitated.

Why?

Because gravity takes time to communicate with the feet.

Supply shocks work the same way.

When the Strait of Hormuz is blocked, the impact isn"t felt at the petrol pump or in corporate margins the next morning (although it may feel like it).

Inventories are full. Contracts are locked in. The real damage from a blockade is cumulative, not instant.

Therefore, is the market currently enjoying that mid-air levitation?

It could be.

The risk(s) are still there – however its impact could be delayed.

Force 3: Power of the Status Quo

There is a fascinating psychological shift happening right now.

Usually, every day a conflict continues is seen as a negative.

But we"ve reached a point where "no news is good news."

If the status quo is a blockade, then every day that passes without a major escalation – every day Iran doesn"t retaliate further – is viewed by the market as a move toward a resolution.

I"ve heard this rationale from various analysts over the past few days.

My take is that the bar for "good news" has been lowered so far that simply "not getting worse" is now treated as a victory.

Should it be?

This creates a scenario where risk aversion goes out the window.

Investors confuse the possibility of a resolution with the probability of one, and eventually, that probability morphs into a certainty in their minds.

Here"s my approach….

When the macro environment gets this noisy, the best defence is to return to the fundamentals.

We don"t need to predict the exact date a blockade ends or what ridiculous Trump tweet will come next if we are holding assets that meet a strict quality filter.

Whether the Gulf is in turmoil or not, we should still be looking for companies that demonstrate characteristics such as (not limited to):

• Strong balance sheets with low levels of debt;
• Consistent free cash flows over long periods;
• Proven long-term high returns on equity (15%+) and invested capital (15%+); and
• Strong defendable operating moats – demonstrated by pricing power.

If a company exhibits such qualities – it"s better positioned to weather a (lengthy) spike in oil prices; and/or a season of geopolitical uncertainty.a

Putting it All Together

The lesson of the last few weeks isn"t that geopolitics doesn"t matter.

It"s that the market is an "expectations machine," and right now, it expects the bull to run.

The "innovators" got in early at prices not yet elevated by this popularity (i.e. when the asking multiple was reasonable).

However, the "imitators" are joining the party now, driven by the fear of missing out.

We must be careful not to become those who swallow the promises at the very end when standards have been lowered and prices are elevated.

The most important question isn"t "is the news bad?" – it"s "what price is safe to pay to participate?"

In other words, what"s the multiple being asked?

I will close with another quote from Munger:

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."