THE Oxford dictionary defines risk as “a situation which could be dangerous or have a bad outcome”. Every investor has their own interpretation and understanding of this and, irrespective of how much money you have, the majority of investors fit into the same category and are often governed by the emotions of greed and fear directly relating to investing.
Markets are driven upwards when fundamentals and sentiment are in sync — the opposite being true when both are negative. Any Grade 10 pupil should understand this. However, most investors are unaware that, behind each of these factors, is a whole range of issues dictating future fundamentals and sentiment.
It’s a challenging decision to know when it is the right time to take more risk and how this risk is aligned to your investment strategy.
Over the past 12 months, I have seen great diversification in thinking regarding investing. I’m on public record, in press, radio and TV, advising investors not to panic or take major decisions during the time when markets were collapsing and all the news was negative.
My reasoning for this is as follows:
n At the beginning of last year everything looked rosy but in reality the world was very sick. I liken this to my own situation in 1987 when, at the peak of fitness and when I really looked well, it was discovered I had cancer and needed chemotherapy. Six months later, yellow and hairless, when I looked at my worst, I was actually getting better. That’s what has happened to our world. It’s had its own brand of chemotherapy and now things are starting to look better. As with chemo, one is never sure whether further treatment will be needed.
n From the Second World War to the present day, every major world crisis has had opponents. The fight in the economic war has few opponents. The Group of 20 countries are in agreement that they need to bring their economies out of recession, create more jobs and restore economic growth. Each country may be doing it differently, but at least each is doing something.
n Shares were at bargain prices six months ago and some investors were waiting, and still wait, for the “ sale” prices to drop even further.
n What I’ve found alarming is that so much money moved out of the market at the wrong time, and then found its way into money market accounts when interest rates were high, with investors once again taking a bath and showing great losses.
Now, in the past few months, large sums have left money markets to go back into the equity markets, missing that the market had already moved up 35% and is now up 53% from March this year.
n This makes no sense to anyone with a long-term strategy as investors are always advised to sit tight during volatile times. I can only reiterate that this behaviour supports the view that many long-term investors do not really understand what this means and that sentiment drives their decisions.
So now you are back in the market and, if you are an investor who identifies with this behaviour, I ask you the following risk question. How do you feel about losing 20%-25% on paper over the next six months? I would expect the answer to be that, although I would not be happy, it does not matter as I’m taking a long-term view and, over the next seven to 10 years, will beat all other forms of investment. Great answer! However, isn’t this the same answer you gave a few years ago and then panicked?
I’ve always been a bull and rightly so. Over the past 40 years, I’ve made good investments and had good returns out of the market.
The reason is because I’ve always held quality shares and only sold when I chose to or needed to rebalance the portfolio.
This does not mean I haven’t taken any losses. Of course I have. I’ve invested in companies which looked good but did badly, or even disappeared from the market.
Fortunately, by investing in the top companies, I have only occasionally made changes to these choices from time to time and have done well. As bullish as I am currently I see that the v aluation c onfidence i ndex falling and I expect my own portfolio to drop significantly during the coming year.
Although a little pessimistic, I will stay invested and even phase more money into the market over the next six months to take advantage of any downward trend.
It must be considered that the sharp rise in equity prices and earnings expectations from companies could take longer to materialise, but I won’t deviate from my long-term strategy and neither should you.
n Helpline number (011) 8804888. E-mail bryanh@bhca.co.za