After the Rebound, Is It Time to Sell?
“It’s not that we like pessimism, it’s that we like the share prices that pessimism brings.” – Warren Buffett
Will markets test new lows? Or is this a genuine V-shaped recovery?
It is often easy to forget that the purpose of investment—we put capital at risk today in the expectation that the return we receive will allow us to enjoy a better future. Investing therefore involves downside risk, which remains true today.
Of course, we seek to minimize such risks, but no one can predict with any accuracy what will happen to markets in the short-term future. That goes for economies, too—there’s too much that could go wrong to have much confidence in a short-term prediction. Recall, though, that markets predict the economy, not the other way around—and both tend to rise over time.
Turning to today, we believe markets have priced in a fairly optimistic economic recovery from the coronavirus crisis, although this is not reflected consistently. Some “markets” have increased significantly, while others have lagged behind. Whether this is justified or not remains to be seen.
Our way to manage such periods is to stay grounded in long-term analysis. If we are holding an investment for the next 10 years, today’s news will likely be forgotten in a decade’s time, but the price we paid won’t be. We will therefore favor cheaper markets that we believe will thrive over a decade or more. On this, we are still spotting several opportunities right now, even after the rebound.
What portfolio changes have you made?
At our core, we believe investors stand to benefit from a valuation-driven approach, and the depths of the recent volatility created buying opportunities for us, as valuations of certain assets became significantly more attractive (admittedly, many of these have now dissipated, as markets have risen).
Although specifics for each portfolio vary, across our multi-asset portfolios we generally added to global energy, financials, and South Korean equities. On the bond side, we added to credit and high yield. To fund the above positions, we generally held more cash leading into the downturn, which has subsequently been reduced to take advantage of attractive prices. All else being equal, this has helped investors.
Importantly, we held strong in our view over the past few years that markets were overvalued, with few compelling investment opportunities. We were able to do so by heeding Warren Buffett’s advice to be fearful when others are greedy—meaning we spent the last several years of the bull market acting cautiously and working to preserve investors’ capital.
So while capital preservation remains a key part of our investment process, market conditions are still better than they were—in our view—and we’ve proactively captured these opportunities accordingly. Indeed, we’re still finding assets that we consider to be good value for the first time in many years. You can think of this as a shift from capital preservation to return generation, which we believe will help empower investor success.
Considering taking flight after the rebound?
We’ve heard of some people trying to time the market, concerned about a second wave or an outright depression. While these fears come from well-intended origins, we encourage investors to take a more pragmatic approach—invest regularly, offset risks, be intelligent about minimizing costs, and let the power of compounding carry you.
Think of it this way—there are always reasons not to invest. Take a moment to reflect over the past 100 years. We’ve been through two world wars, over a dozen recessions, a financial crisis, and a Great Depression, to name a few. Every one of these involved a post-event rebound, sometimes of dizzying speed, with many avoiding a second crash.
Put in this context, while the consideration to seek shelter is an understandable response, we believe that investors should stay focused on their long-term financial goals and use this as their anchor. It is important to remember that there are times when markets can and do get out of hand, and that market declines are a potential consequence. While market volatility is uncomfortable, it is important to keep your focus on the long run. On this, we are closely monitoring portfolios to ensure that we take opportunities to buy good assets at cheaper prices, but also to continue preserving capital.
Further information
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