Don’t jump at shadows

Don’t jump at shadows

As most readers will know, in July 2015 we launched the Montgomery Global Fund and The Montaka Global Fund. We were rather shocked when, just a month later in August, two or three investors withdrew their investment. When surveyed, the investors who withdrew their investments cited fears about an economic slowdown in China and its potential impact on markets globally.

This jumping-at-shadows behaviour leads to poor outcomes.

According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), which has now been running for 21 years, the problem is not the returns of the funds. In many cases, the funds have outperformed their market benchmarks. The problem is that investors are producing lower returns than the funds they invest in.

According to the report, the average mutual fund investor has simply not accomplished either the goal of maximizing capital appreciation or the goal of minimizing capital loss.

Investors who try to time the market invariably buy at the highs and sell at the lows. Of course this is a function of the minute-by-minute quotation of share prices. The same behavior would be seen in property if house prices could be seen changing every second. In that scenario property owners would spot trends and draw charts and then start trading property; “come on Darling, four bedders are going down, we need to sell now and buy one-bedders”.

Silly behaviour emerges when instead of focusing on a business investors focus on economics, or the market’s gyrations.

Consider the US IPO of Coca-Cola in 1919 at $40 per share. “A year later the stock was trading at $19.50 – the result of rising sugar prices and a perpetual contract Coca-Cola had with its bottlers to supply syrup for $1 per gallon. What would have happened if your grandparents or great-grandparents purchased a single share in 1919 at $40 and held on through the subsequent decline to $19.50 in 1920, – then on through the great crash of 1929, the subsequent depression of the 1930s, World War II, a baby boom, dozens of other wars and skirmishes, an oil crisis, assassinations, the fall of the Berlin Wall, yuppies, innumerable recessions, booms, busts and scandals, as well as a war in Vietnam, two in Iraq and a global financial crisis? If they kept this share in the family and reinvested all their dividends, they would on 8 January 2010 have 126,321 shares and their investment would have a market value of $6,966,603.15.”

That’s what I wrote in my book Value.able, published in 2010. Since then however the dividends have kept on flowing – there have been another 14 in fact – and there was a two-for-one split on 13 August 2012, as well.

By March of 2015, after 14 further dividends and the two-for-one split, and since 8 January 2010, the value of that single Coca-Cola share in 1919 had grown to $11.7 million.

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The Montaka Global Fund and the forthcoming Montaka Global Access Fund can provide the benefits of 1) the ability to profit from extraordinary global businesses, 2) the ability to profit from deteriorating businesses, 3) enhanced downside-protection from significantly reduced net exposure to the stock market overall and 4) currency diversification.

To pre-register your interest in learning more about the Montaka Global Access Fund (minimum initial investment $50,000) click here to leave your details.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

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.