A Simple test of your time horizon
We – along with many others – talk a lot about the benefits of being able to take a long-term view in equity markets. A study of history shows clearly that equity markets regularly throw up challenges to investor patience, and that those investors best able to meet these challenges are likely to do better. The very best investors are often people who have mastered the art of doing nothing at crucial times.
But how do you know where you stand on the patience scale? One simple way to answer this, I think, is to examine your emotional response to sharp market declines. Declines like the ones we have seen in recent weeks, or better yet, the really big, nasty declines that come along every decade or so.
If you are unfazed by these sorts of gyrations, that’s a very good start. A common inclination when markets tumble is to panic, and rush for the exits. However, if you think equities are expensive after the tumble, then why were you holding them before it?
Sometimes this rush for the exits will turn out to be the right decision, in the same way that betting on black at the roulette table will sometimes turn out to be the right decision. Ultimately, though, good investing is driven by logic and analysis, not emotion.
So being unfazed by market turbulence is a good start, but if you have a really long-term view, you won’t just be unfazed by market falls, you’ll actually relish them.
You’ll relish them because big market declines allow you to buy future cashflows at lower prices and therefore accumulate more of them. Being able to accumulate more of these future cashflows will lead directly to increased wealth over the long run.
So, on a scale of 0 to 10, where:
0 = “I sold 85 per cent of my portfolio in October and don’t have a plan to get back in”; and
10 = “This is starting to look interesting” *rubs hands with glee*,
Where do you stand?
I’m giving myself a 7.5. Maybe an 8.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Max Zan
:
Hi Tim
For the past few years prior to October 2018 I was a “1”, but since October 2018 I’m starting to get more interested and inclined to gradually move to a “6” as more blood flows on the streets.
The lower the price you initially pay for an investment the greater your future return – I have no regrets about holding high amounts of cash when valuations don’t stack up and then deploy that cash when valuations make sense. – it’s usually the opposite of what most Investors do and that’s why many fail to do well in the stockmarket.
Tim Kelley
:
That is an important insight, Max. A great deal of harm is done when investors add to their investment when times are good, then pull money out when times get tough.
Richard
:
As a prior investor in your fund, it was apparent by your perpetual whining about cash being a ‘drag’ on your performance, despite one of the best bull markets in history, that you are more like a 1 or 2 out of 10 when it comes to cash allocation Tim. Perhaps your ego is larger than you skill as a manager.
Tim Kelley
:
I’d have to agree that our ability to time the market using cash is very low, and our willingness to hold cash despite this is not to everyone’s taste. Our approach appeals mainly to investors who are willing to forego some upside in the good times in return for capital preservation when markets decline. Since the inception of the fund, this has resulted in above market returns with below market risk, but it has certainly slowed things down in the good times.
Chris
:
I’m an 8, but if there was blood in the streets, I’d be like “Spinal Tap” where the amplifier goes to 11.
Jason
:
When VIX is 25, it starts to look interesting.