Win with COVER & Emperor Asset Management


There is no such thing as straight-line investing

Anet Ahern, CEO at PSG Asset Management 

At a time when many global indices are trading at or near all-time highs, investors are reminded that its wishful to think of any definitive stock market trend as moving only in one direction. The rand has strengthened by 20% over the past year, the MSCI World Index is up by 40% year-on-year and value has started outperforming growth after multi-year growth leadership (as measured by the ratio of the Wilshire US Large-Cap Growth Index divided by the Wilshire US Large-Cap Value Index, 
source: Longtermtrends).  

But behind every monthly or annual performance number are multiple daily or weekly data points, and the picture we see changes considerably depending on our viewpoint and our state of mind. 

Consider the rand. Behind the headline rand strength number lies at least four periods of weakening over the past year.   Whether you looked monthly or daily greatly influenced your assessment, as the graph below shows.  

Rand/US dollar exchange rate over 1 year 

Source: PSG Asset Management and Bloomberg  

Taking a slightly longer-term view, one can see these fluctuations in context and that we are simply back in the same territory as five years ago. These observations are not intended to detract from the sensible practice of offshore diversification, but they highlight the risks of acting on extreme moves, especially shorter-term ones. The 20-year chart shows this clearly – the time to move assets offshore in the past five years was in fact when we felt the best about our currency, in early 2018.  

Rand/US dollar exchange rate over 20 years  

Source: PSG Asset Management and Bloomberg  

On a day-to-day view, markets very often run counter to the trend, and it is this noise or variability that makes it so difficult to confirm the bottom of the market or the beginning of a new cycle. Therefore, investors waiting for a clear sign of change in any direction seldom get their timing right. No-one rings the bell at the bottom of the market, and declares it is safe to get back in, as many who disinvested into the first quarter of 2020 found out. No market trend (or recovery) moves in a straight line.  

Markets produce contrary signals all the time. Economically sensitive stocks may appear to be on an upward trend, only to reverse direction for days or even weeks; a blistering commodity run will end suddenly and appear to reverse direction; and we have already highlighted the rand’s legendary volatility above. The challenge to us as long-term investors, is not to be fooled by noise and random short-term movements.  

Looking for catalysts (the ‘one’ variable that signals a sea-change) is a dangerous pastime. Often the catalyst has long been expected and priced in and therefore has little or no discernible effect (the Moody’s downgrade of 2020 is good example of this). Another example: it is hard to pin down the exact reason behind the recovery in market breadth and the improvement in the performance of mid- and small cap (often economically sensitive) shares (Russell 2000 index used here as indicator) that started in November last year. Was it Biden’s win, the announcement of a vaccine, or the huge stimulus package, which was already old news at the time, extreme valuation differences gone too far, or potentially rising interest rates that sparked the about-turn? In truth, all of these played a role in the strong reversal of fortunes we have seen in the past eight months between the go-go-growth sectors and the more cyclical areas.  

Nasdaq and Russell Indices ex based to 100 over the past year 

Source: PSG Asset Management and Bloomberg 

A more robust strategy in our view is to build your investment thesis from the ground up, based on sound research and debate, and to always include opportunities in unloved and underappreciated sectors of the market where low entry points provide a margin of safety. Using multiple measurement points and tools can also add to your confidence that you are seeing the bigger picture and aren’t fooled by the shorter-term data. It is also imperative not to underestimate how context (news headlines) and our own emotional state (often influenced by the headlines) can sabotage your judgement. 

When the market runs counter to what is expected, as it so often does, it is very easy for investors to give up, think they got it wrong, and sell out of their investments prematurely. It has been shown time and again that investor behaviour is often a destroyer of long-term wealth. It is only when our investments are founded on thorough research, employing many different measurement tools and techniques, that we can stick with our long-term positions even during challenging times, if that is what is appropriate. Confidence in your investment philosophy and process becomes that much more important when your aim is to seek out underappreciated and overlooked gems with a view to securing long-term growth. You can only successfully invest in what is underappreciated or overlooked if you are early to the market: by the time the trend emerges, a large part of the opportunity has long dissipated.  

Markets do not move in straight lines, and multi-year trends do not reverse smoothly either. Investors wanting to build long-term wealth also need to be prepared for having their views tested by market volatility and be confident enough in their chosen philosophy and strategy to sometimes sit on their hands and be patient, waiting for the bigger picture to come into full view.  

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