Keeping a level head
Global markets have been unsettled in recent times. In under a month the ASX 200 is down by close to 10%, and numerous Asian and European exchanges have declined significantly in the same period.
When markets fall, human nature can do odd things to our thought processes. In particular, there is a tendency to extrapolate recent performance and arrive at the conclusion that we should withdraw capital from the markets after a fall. The rational part of us knows, however, that if the price of a good company is lower than it was a month ago it is likely to be a better – rather than a worse – investment (provided its long-term prospects are intact).
Pleasingly, our investment process removes some of the emotion from investment decisions, and led us to increase cash holdings ahead of the recent turbulence. While the broad decline in share prices caused some pain, it was significantly less than it could otherwise have been.
As prices drop, the same process will see us progressively redeploy that cash back into the market. This may run counter to what our emotions might be telling us, but that is exactly what it’s there for.
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.
Andrew Legget
:
I have to admire your funds setup Roger. This post post by Tim had a lot of good points but i think the one where Tim mentions that you guys increased your cash holdings was one that stood out.
I understands peoples concerns about large cash holdings, especially as it earns low returns however i think one big issue that investors trusting their money to managers and funds (particularly retail investors) need to change is their expectations about what they are hiring the manager to do.
Yes, they are a fund manager but i would prefer the term change to investment manager. I would prefer a fund manager who is entrusted with my money to be able to make investment decisions based on what the best move is rather than needing to troll down to a situation which they know deep down isn;t a good opportunity but rather one forced on them by inflecible mandates. If that is cash then so be it.
I would prefer to have my money in a fund which can show outperformance rather than one that is tracking or not beating the market as they had to buy some stocks at record high prices as their mandate won’t allow them to keep anythign except about 10% in cash. Especially if i am expected to pay them fees for it. I can make decisions that lose money myself, even though since i have stopped speculating and started value investing these times are much more infrequent.
Good work with the fund Roger and all.
Chris B
:
This is a very important point for an investor. When the market is down, there may be some real bargains. When the GFC hit, I stocked up on some good companies. It was the best time to buy.