Is the market making you miserable?
A number of people have commented to me recently about the miserable state of the equity market. This is understandable, given that the ASX200 has fallen below 5000 points, having threatened 6000 points earlier in the year, and losses are always painful.
However, it struck me that while many people see the weak market as a cause for concern, we at MIM are more sanguine, and the difference in mindset is potentially very important in shaping long-term investment results.
As many readers will know, one of the most destructive things an investor can do is pull money out of the equity market following sharp price falls, and put money in following runs of strong performance. While it may feel at the time like the right thing to do, this behaviour results in investors systematically selling low and buying high. Extensive research has shown that this leads to dramatically weaker long-run investment results.
For our part, we view market weakness in a more positive light. Our process forces us to take money off the table when equities start to become expensive, and at the time that usually feels uncomfortable. Cash earns very little, and is a significant drag on performance if markets continue to run. However, having felt that discomfort early, we see subsequent market weakness almost with a sense of relief, as it may provide opportunities to redeploy some of that cash to good long term effect.
The equity market can be extremely complicated, but long term success is often about getting a few simple things right. In difficult times, some of the best advice to take is probably what’s written on the cover of “The Hitch Hiker’s Guide to the Galaxy”.
Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To invest with Montgomery domestically and globally, find out more.
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.
Peter
:
Hi Tim, not sure if this question is totally aligned with your post, but I’d appreciate your thoughts on IMF.
Cheers,
Peter
Tim Kelley
:
Hi Peter. There is no clear consensus here on IMF. Different members of the team have different views. It’s no longer held in the funds, reflecting in part a lack of conviction and in part a lack of liquidity (as opposed to IFM which we continue to hold).
Andrew
:
I have come to see days like these as nothing more than natural phenomena, much like the seasons or the tides. They come & they go. Yeah it’s gone down today and maybe for a little while yet. But you’re not likely to lose everything unless: 1.You borrowed the money to buy the equity and the lender wants it back right now 2.You bought a dud equity (ie a business or a industry that is in structural decline), or 3. you sell a good business while it is cheap.
In any case, I have a position with the Montgomery fund. In fact, with cheap stocks like this around, I should increase it so they’ve got more to go bargain shopping with.
Kelvin Ng
:
Thanks Tim. Not miserable at all, looking for opportunities. What do you think of SGF?
Thanks.
Kelvin
Tim Kelley
:
That’s the spirit, Kelvin. SGF looks interesting. Not sure about value at these levels, but haven’t studied it closely so may be missing something.
david klumpp
:
Thank you Tim for the reminder. One would not be human I think, if no feeling when one’s share values drop drastically, or no sense of euphoria when market keeps rising. However, your advice is, as always correct. One must adopt a no-panic mode when markets drop, and hopefully begin to take advantage of opportunities (assuming you put cash aside). Was it the King of England that advised? “Keep calm, and carry on”.
Steve
:
Hi Tim,
Off topic, but could you update us on the quantitative study (sorry forgot the name of the system) which had I think from memory selected 25 good companies and 25 bad (or maybe it was 15)…..
regards
Steve
Tim Kelley
:
Hi Steve. We wrapped up the series with this post: Here. In summary, the machine did well overall, with a spectacular 1st 6 months followed by a mediocre 2nd 6 months. I note that since then the long portfolio has gone on to outperform and the short portfolio has gone on to underperform by a large margin. We continue to operate the system and take some interest in what it has to say about companies we might invest in.
Lucien Heffes
:
If anyone becomes miserable in market downturns or euphoric in upswings, they probably shouldn’t be invested in the stock market. I suspect that stock market investment may not be consistent with their risk profile.