Internationally, investors remain risk averse, with the current global market turmoil and frequent bad news from the US and Europe adding to their cautiousness. However, there are always opportunities in the market.
The key is to find mispriced risk and arbitrage this in some way. In this regard history tells us — and this is unfortunate — that it is easier to generate superior investment returns off people’ fear than profit from their greed. When making decisions, investors should combine a value-based approach with a healthy dose of pragmatism and long-term thinking.
To find success in the financial markets, detail and discipline are key. Investment stories and dogma, such as what we are seeing in the global economy currently, are often prompted by panic and emotions rather than a consistently rational analysis. So, while world markets are in turmoil, and the US and Euro debt crises continue to unfold, Sanlam Investment Managers’ approach is to focus on risk-adjusted valuations and to continue to be pragmatic about where we choose to invest.
The history of financial markets and the evidence tell us, that forecasting is foolish. And that risk is ever present. While the capitalist system has produced wealth that is unprecedented in history, it is inherently risky — everyday we wake up and depend on billions of other people, incentivised by self-preservation, interest and a host of other motivators to fulfil our needs and wants, and to make reliable prices. A lot can, will, and does go wrong.
Despite the past period and current situation having been exacerbated by governments and regulators not fulfilling their role, this period is really any more risky than 1986, 1999, or 2007, one year before each of the last three global crises? Perhaps this is a new normal. However what is worth remembering is that — while the macro backdrop is important — money is made and capital is preserved by looking at the details of valuations and by evaluating the odds of specific instruments, classes of instruments or company shares in their own right, and also relative to their history.
Mean reversion isn’t dead. A hundred years of stock market history, two World Wars, a Great Depression and countless other crises have taught us that. In our view, a much more fundamental breaking of the system would need to happen for that to be true. And this in itself can’t be known. So while we can easily be paralysed by fear, and get ahead of ourselves with stories on newswires and on TV, it is one’s approach to the market that matters.
This is critical. If we look at what really drives investment success, it remains entirely clear on what an investment philosophy actually means. While we constantly monitor the investment environment and adapt accordingly, fundamentally, we remain true to our philosophy.
Also be careful of avoiding the herd in the quest for superior returns in the opposite direction. Remember the early investors into Citibank as Lehman’s was unfolding? They lost more than 90% of their capital within a year. Taking a contrarian position for the sake of being contrarian can be naïve. Not everything that looks cheap is good value. It is often just a proxy for excessive risk. So, for instance, investing in Greece, just because everyone else is fleeing it, doesn’t take into account the fundamentals that such a decision should be based on.
While making investment choices, it is also important to recognise the structural changes underway within the global landscape. For instance, the growing significance of China and India on the world stage is not going to go away. The US and Southern Europe could take a decade or more to sort out their debt woes. Yes, there will be cycles within this long-term secular story, but these will present buying opportunities. All of the above is where pragmatism and valuations meet.
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