We are all understandably nervous, scared and unsure of the future both in our personal lives and with our investments. When markets have fallen as much as they have in the last few weeks, it is easy to panic – however, one should try to remember that precipitous and crazy falls do present canny investors with once in a decade (lifetime?) opportunities to buy quality shares at bargain prices.
On the N2 between Cape Town and Port Elizabeth are several engineering marvels, bridges of all sorts revered by civil engineers and tourists alike. One particular bridge attracts a certain sort of tourist – the Bloukrans River Bridge. These tourists act completely irrationally for a short while as they allow a total stranger to attach an elastic band to their ankles shortly before they leap 216m into the void that lies beneath the bridge. As a professional fund manager whose clients trust me to manage risks on their behalf, I should perhaps not be admitting this, but I have been one of those bungee jumpers.
216m is an extraordinarily long way to fall, and definitely long enough to begin wondering if the elastic band was actually fastened correctly and whether you are going to descend all the way into the abyss below. But, the elastic takes hold and begins to stretch and when it reaches full stretch, the motion reverses and you begin to bounce up again. The heady feeling of the upward bounce is soon dispelled by a resumption of another fall and then another upward bounce and so on. When the gut-churning bouncing has settled down, an entirely rational player in the drama is winched down to you, still hanging head down facing the bottom, reassures you that all is well, sets you the right way up, attaches you to himself with reassuringly strong straps and you are winched slowly back to the level from which you started. Back on the bridge, your rationality returns and you begin to wonder why you exposed yourself to such a risk but you begin to feel a sense of pride that you survived it.
At the beginning of the year many of us appreciated our investments were at least 216m up in the air but dispelled the notion that they could fall the full distance, but fall they have and probably way further than we thought. And unlike the bungee jump, some of the bounces have bounced lower than the original fall.
Investment markets are fuelled at all times by fear and greed. Greed drives prices up and fear causes them to fall. There are several versions of measuring where the markets are at any time. This can be seen in a graphic overleaf of the emotional cycle experienced by investors. When one is most despondent is often the best time to buy.
Investors emotional cycle
Source: Online Trading Academy
Fear has made investors believe that shares that were worth a certain value 3 months ago are now worth 33% less. Unless something truly fundamental has changed the rules, that is obviously irrational and unsustainable. The fear of the effect of the COVID-19 disease has generated an illogical fear that a fundamental change has taken place. This is simply not the case. It is not the purpose of this article to delve into the causes and effects of the virus and disease themselves other than to say the global run on toilet paper is a prime example of the craziness experienced all over the world.
The chart below shows that for 5 years or so, rational, professional investors deemed the FTSE-JSE All Share Index to be worth between 50,000 and 60,000. In the space of a few weeks that value is allegedly now less than 40,000. Logical? Obviously not.
FTSE/JSE Africa All Share Index
The portfolio you owned at the beginning of the year comprises the same mixture of assets it did then. No professional investor has raced to rejig the portfolios. Indeed, many are licking their lips at the discounts available to them with shares a third cheaper than they were just a few weeks ago.
Typically, the statistics you see on the television and in the press are based on shares only and most investors have a diversified multi-asset portfolio so your portfolio will have been less affected than the reports suggest.
A common saying in investment markets is that they go up on the stairs and down in a lift. After the Global Financial Crisis, markets ground up the stairs slowly for 10 years only to plummet in the lift in a few weeks. Similarly to the analogy above, the bungee jump goes down in a flash and back up again on a slow winch. We cannot tell you when the winch or slow ascent up the stairs will start – only that it will. And markets may fall more before that happens.
If you switch or sell now, it is equivalent to cutting the bungee cord or getting out of the lift. You permanently remove any chance of recovery. There are several quality shares across the world now that are priced at less than the cash they hold in the bank. There are shares where one can buy whole subsidiaries for free, implied in the current price.
There is no doubt that the COVID-19 disease will have a profound effect on global growth, supply chains, availability of merchandise and medical supplies. Many people tragically will die, particularly those most vulnerable, and we must all do everything we can to “flatten the curve” by taking the recommended precautions. However, this will pass and in a surprisingly short time, we will be looking back with a big “Phew!” and congratulating ourselves on having survived what may turn out to be the most dire time in our investment lives, measured by many different statistics. Many records will be broken – negative days, volatility, drawdowns. Maybe others will also be broken – fewest days to recover, largest positive days.
Now is the time to hold fast, however difficult it feels. The markets always overreact in both directions and global markets are already in oversold territory.
The man in the winch will come down to set us the right way up for the journey back and the slow trudge up the stairs will start again.
The content of this interview is for information purposes only and does not constitute an offer or invitation to any person. The opinions expressed are subject to change and are not to be interpreted as investment advice. You should consult an adviser who will be able to provide appropriate advice that is based on your specific needs and circumstances. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable and given in good faith, but no representation is made as to their accuracy, completeness or correctness.