Daily Equity Report
Seed Weekly - Do the work stay your course
Sticking your course over the long term is a very valuable lesson for investors, albeit, a difficult one in practise. Juxtapose this with another valuable lesson of not holding onto mistakes for too long and it becomes apparent how complicated the investment decision can be for the investor, particularly in tough markets. In order to get the maximum benefit of your investment, you need to stick with the investment over the long term, even during painful periods of underperformance which make it more challenging to determine whether you are holding on to a mistake or not.
The investment decision for average investors and experienced professionals alike is clearly not easy, particularly when the markets are so volatile. The emotions of fear and greed are quite highly associated with the unpredictability of markets. Investors have an inherent fear of losing money (rightly so) and also of not making as much money as others, that is, underperforming the market. Greed can be broken into the greed of making more money, and a type of greed that is synonymous with fear of losing money, where it is greedy to just bank returns already made rather than let the investment run its course for higher potential future returns (let the winners run). This is illustrated below.
Source image 1: [Online] Available at: http://energyandgold.com/2015/04/01/from-greed-to-fear-in-one-month/ [Accessed 20 Sep. 2016]
Source image 2: [Online] Available at: http://www.innovativewealth.com/wall-street-wisdom/investing-with-fear-and-greed/ [Accessed 20 Sep. 2016]
Unfortunately, the results of investment decisions motivated by emotions of fear and greed can be detrimental. Numerous research has been done pointing to the benefits of staying invested. Morningstar recently published an article which highlights the benefits of staying invested. Whilst the article looked at market timing, it is interesting to note that over the last 20 years, missing the best 25 days on the South African market would have halved your returns and missing the best 30 days on the S&P 500 would have reduced the return to zero. Since one cannot determine beforehand when the good days will occur, it is very important to stay invested.
Source: Morningstar Direct. Data from 31 August 1996 to 31 August 2016
In order to have better chances of success in one’s long-term investment strategy, controlling emotions and not blindly following the market is critical. However, the ability to divorce one’s emotions from investment decisions is a skill which is not easily come by, especially when the confidence in your investment or investment manager has dwindled. Some skilled professionals (managers) through years of experience have mastered this and can detach their investing from their emotions. If such professionals possess the right kind of skills and investment strategies, it would be wise to rather allocate the investment making decision to these managers.
Also, it is important to recognise that even the best managers underperform at times and skilled professionals also make mistakes. As highlighted earlier, it is important not hold on to mistakes for too long. Figuring whether current underperformance is a result of a mistake that will persist is difficult particularly because sometimes it takes time for value to be unlocked. Good managers, acknowledge when they have made a mistake and accordingly correct such mistakes.
Getting comfort through this “long-term” journey requires one to do proper research on managers before selecting them and then sticking with them over the long term. At Seed Investments we have a rigorous manager selection process that emphasizes qualitative characteristics in addition to quantitative measures. It is not enough to know what a manager has achieved in the past but more importantly, what they can potentially deliver for clients in the future.
Therefore, a manager’s philosophy and process and how this reflects in their portfolio and performance is import. The quality of the team, commitment to the philosophy, consistency, passion, perspective and progress over time also highlight some of the things we look out for. We continually monitor this and have regular interactions with the managers.
The confidence that we get from our rigorous process, continuous research and monitoring, not only gives us the comfort to stick with the managers over the long term but also to have the confidence that we are not holding on to a mistake for too long.
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Wed, 21 Sep 2016- 11:05