Comfort and the art of investing
By Anet Ahern, Chief Executive Officer at PSG Asset Management
“In investing, what is comfortable is rarely profitable.” Robert Arnott
Investment markets are often rich with opportunity when sentiment is poor. When the crowd is complacent, danger usually lurks close by. This has been the case at several points of extreme exuberance over the past four decades. 1987, 1999 and 2007 come to mind. On the contrary, when sentiment is poor, investment markets are often rich with opportunity. Unfortunately, the average investor seldom participates in these. One can think back to 1979, 1992, 1998, 2003 and 2012. Each of these points were preceded by one of the worst 5-year returns seen in our equity market in 40 years. Each point was followed by abundant double digit returns for at least the three years to come. When one looks back from the height of a bull market to its initial phases, the opportunities always look obvious with the benefit of hindsight.
Opportunities are much harder to spot at the time as they are clouded by gloomy sentiment
South Africa is our home, so the negative political and economic headlines naturally provoke a fearful and emotional response. Many investors would have looked to the election to provide some signal or at least less uncertainty so that they can make investment decisions with more confidence. But buying opportunities are not accompanied by a ringing bell. They are found by interrogating facts and valuations with utmost thoroughness. Emotion needs to be replaced by process if you want to excel in investments, now more than ever.
If someone had to say to you that you could double your money in 7 1/2 years, and earn a return above inflation of 5%, would you be interested? As a building block in a retirement fund, that is an extremely attractive proposition. I am of course referring to the South African Government long bond. And immediately, it doesn’t sound like such a comfortable place to invest as the spectre of junk status still looms! A closer look reveals that, based on bonds all around the world, in countries with even more dire fiscal issues than ours, we are already trading as if we’d been junked. We believe that the scenario that makes us uncomfortable is already reflected in the price.
As our new political era unfolds, the landscape will be peppered with large problems involving Eskom, general service delivery and unemployment to name a few. There will also be small wins. Examples of these include structural stability at Treasury, stable low inflation and the judicial system slowly flexing its muscles.
Deciding whether to stay invested lies not in how comfortable we are with the current situation, but rather in answering these two questions:
• What is already factored into the price?
• Have I set up my investments to reflect both the opportunity and the very real risks?
The road to excellent prospects could well be rocky
In answering these questions, we have structured portfolios that reflect the value we see in local stocks and bonds, combined with a healthy holding in liquid money market instruments and attractively priced offshore holdings. Conviction is certainly present in our funds, but we acknowledge that the road to the excellent prospects for our investors that we see in the years ahead could well continue to be rocky. To quote Jack Bogle, founder of the Vanguard Group: “Your success in investing will depend in part on your character and guts and in part on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.”
Andrea Kirk cdcom
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