This time it's different

Should I stay or should I go now?
If I go, there will be trouble
And if I stay it will be double
So come on and let me know”
The Clash

Wow, share markets are moving faster than a ‘buttered bullet’. One moment we’re at historic lows, never seen since the great depression, and the next were moving into a new bull market! Man, investing during a pandemic sure has a degree of difficulty.

And right now we have to struggle with “fear of missing out”. That once in a generation buying opportunity we’ve all been waiting for is suddenly slipping away and we’re missing the boat. Global markets have well and truly rallied off their lows with what seems like a pretty strong uptrend taking place.

So the million dollar question is, “do we get involved or is this one of those feared ‘bear market traps’?”

Well, one thing’s for sure, there’s certainly no shortage of opinion about what we should do out there. And like me, no doubt you’ve tuned into the business news to be bombarded with ‘expert’ opinion about which way we should go. On rough estimate, the longevity of this current rally seems split down the middle. There’s certainly strong opinion both for, and against, as well as whole host of thoughts in the middle.

So between ‘hold on to your cash, this market is about to collapse’, to “we’ve certainly reached the bottom and you better get on board” there’s also just about every other conceivable combination you could think of, which is most certainly muddying up an otherwise pitch-black pool!

But if nothing else, this diversity of thought just confirms my belief that absolutely no one, and I emphasise the word no one, knows what is going to happen.

For a very long time, one of my many investing mantras has always been to ‘ignore the noise’ and this certainly includes ‘expert’ opinion sprouted forth whenever markets tank. So I’m certainly not an avid consumer of all this ‘punditry’ crowding our business news. In saying that however, I do welcome the discussion that a crisis like our current events garners, and will at least reflect and consider, some of what our ‘experts’ are saying – but always with a healthy ‘grain of salt!’   

So I certainly won’t be formulating any definitive investment actions based on what I am hearing. As I mentioned earlier, these are all just opinions and have absolutely no validity as standalone advice what so ever. Unfortunately, investors can be totally swayed in their actions, just listening to a couple of similar viewpoints uttered in stern tones by fund managers who’ve been wheeled out by broadcasters for appropriate comment when required. And if you are a genuine long term investor, nor should you listen

Peoples opinions are just that, their OPINION. It doesn’t matter who they are, what they do, or how learned they may be if their opinion is canvassing what is going to happen at some time in the future,  it’s useless.

Sadly these nuggets of intelligence, wrapped up in stern, knowledgeable tones, are not ventured through a concern for our investing welfare. Rather, they’re just another way to cut through the endless stream of information published each and every day. In an attempt to reach out to us as individuals in the hope we will connect somehow with an associated product or service of the person making the quote.  

And more than likely 99% of all comment is given to us by professional money managers. And whenever a professional money manager spurts forth their ominous warning, it’s invariably accompanied with a bio of the otherwise unknown ‘sage’ So along with their name, we also get the fund they manage (which is always open to new investment) and to add a certain imprimatur to their predictive prowess, a previous prediction that was somehow on the money. So the headline or introduction goes like this;

John Smith, Chief Investment Officer for the XYZ Quant Hedge Fund suggests caution when pursuing investments in the current market, “there’s still plenty of downside risk left!” he said. Smith, who previously predicted the market lows during the sorghum grain crisis of ’93 suggests the very best avenue is to stick with a professional money manager whose experience is invaluable during current conditions. His own XYZ Fund has actually been able to post a 6 months positive return of 2.3% compared to the overall markets 6 monthly average of  1.9% etc etc etc.

There is no better interest than self-interest and the predictions currently swamping us are ventured forth not to assist and guide us poor retail investors but I suspect more likely to garner a bit of free air time on a cable business show or newspaper to pump up the fund’s inflow.  And the more sensational the prediction, the better! So markets don’t just fall, they will “collapse in an event never before seen in history”. And they most certainly won’t just go up, no wayyyy!  “The Dow will be powering through 60,000 points by the year-end, guaranteed!”

Take some time to look at a lot of the predictions being made out there. You’ll be surprised at the outrageous nature of them, and all with not one skerrick of proof to support them. It seems they are formed either from a ‘gut instinct’, ‘what someone is thinking will/might happen’ or ‘just how they feel at the moment’.  Consequently, they should all be given the validity of ‘politicians promise’! Unfortunately, though, they can, and do sway the rational thought of investors.

Shares beat property investment

So it’s very important to remember that there are generally two types of investors operating in the share market; the professional money manager and the rest of us. The rest of us being ‘the mums and dads’ as it is sometimes colloquially put, but more appropriately, the retail investor. The money manager is acting on behalf of others whilst retail investors act on their own behalf. One very important distinction between the two is that professional managers, on the whole, have, absolutely no ‘skin in the game’!

And it is the professional managers, in charge of superannuation funds, unit trusts and managed investments that are giving us all these predictions of market calamity or missed opportunity.

So in order for us to be able to confidently ignore their opinions we certainly need to be convinced that their investment ethos is the absolute opposite of that of a long term investor.

To begin with, a professional manager is paid to manage a fund’s performance. Their expertise is dedicated to ensuring a consistently high return on invested funds for which they are richly rewarded. Hence performance bonuses play a huge role in their salary structure. This is because in today’s competitive funds’ management world it is imperative for public offer investments to show consistently high rates of return in order to attract new money into a fund.

And, the greater the money flow, the greater the number of fees received, which all leads to greater profitability. So it certainly behoves the individual manager to be constantly talking up their product through every available means. 

Now as a result of this narrow focus on returns, a fund manager operates in a totally different performance environment than us, the retail investor. And even more so when contrasted with a long term investor, who subscribe to much greater freedom when managing their own money.

So let’s now take a look at what really makes the fund manager such a unique investor. And by doing this demonstrate why they are so quick to throw up the opinions and of course why we need to be wary of those opinions!

  • They have a 3 month time frame, not a lifetime.

All public offer funds publish their results on a quarterly. Therefore, managers only have a three-month window to create magic. The industry is totally geared to analyse and compare these quarterly fund performances against each other. With each fund’s performance divided into either one of four quartiles.

The top quartile is obviously the best, followed by the second and third with the fourth being the worst. And as you can imagine, all funds strive for consistent top quartile performance. In fact, fund BDM’s (sales representatives by any other name) will often boast of their funds top quartile performance over a prolonged period of time when pitching their wares to an adviser!

In fact, lower quartile results are cunningly countered by using a myriad of investment market gobbledegook. One of my favourites being “our fund is style agnostic and therefore expectations of benchmarked investment performance alter dramatically as a result of macro investment forces!” (And your guess is as good as mine as to what it actually means!)

Anyway, as a result of this incredibly short investment horizon, funds are forced to trade just about everything in sight just for the purpose of being in the top position. So for professional money managers, short term is the name of their game. And although they often talk long term aspirations, that’s just a veneer for clients. Rest assured, if it’s not going to pay off quickly, it won’t happen!

Contrast this with that of a long term investor. They have absolutely no one to answer to in terms of portfolio performance and can, therefore, take volatility well and truly in their stride. And they certainly don’t have to act like crazed banshees’ declaring “the sky is falling!”

  • High portfolio turnover.

Again, because of their limited window to show results, managed investments have notoriously high turnover. None of this ‘buy and hold’ for them. Once they can squeeze a profit from a holding, it’s immediately done and dusted and then moved on. Which also applies to those shares that are dragging down results.

Which means individual portfolio components aren’t really allowed to develop; they either make a contribution straight away or they get ‘turfed’ out. In this type of high turnover environment predictions of what’s just around the corner is the order of the day and certainly not about something 5 years down the track.

As you are well aware, stock market ‘kerfuffles’ happen on a regular basis and can drag on for months before they right themselves. Some bear markets can drag on for years. But within high turnover portfolios what happens right now is the only major long term consideration. Extrapolating or even predicting events further out than a couple of months is, therefore, a waste of time and resources.

Whereas a retail investor can most certainly take each and every event in their stride and act according to their investment plan whilst keeping an eye firmly on the future.

Interestingly, just cast your mind back pre-COVID-19, particularly last year, with the many calls from our investing pundits about how overvalued the market was. We were regaled with their accompanying descriptions of repositioning of portfolio’s in readiness to create maximum value from any downward events! But now they are suggesting that we haven’t seen the bottom even after having had a 30% fall. So they’re all preaching to remain in cash till we do! Mmmm, how things can change within just a few months!

While on the other hand, a long term investor wouldn’t have given a toss; buying up when they saw value, and always ready to capitalise on falls by adding to positions at good prices when they are ‘offered’ – quite simple really.

  • It’s a very competitive market place 

The funds’ management space is incredibly crowded. And, it’s no wonder considering the amounts of money to be made. No doubt you’ve seen the size of the house some of these professional managers own and the opulence to which they surround themselves with. None of which was bought through prudent and canny investment directly.

Rather theirs is to ‘clip the ticket’ and take 1% per annum and up to 20% over performance fees. Their wealth comes solely from the volume of funds they hold under their management. 

And a sure way to create volume is to be continuously catching the eye of investors in order to get hold of their funds. And, what better strategy than to produce a constant stream of investment commentary. The ‘rock star’ fund manager is a staple fodder for the endless stream of business and investment news available 24/7.

For they create the content for a content-hungry media, and that content needs to be salacious enough to catch the attention of the viewing public. Hence we are barraged with opinions, thoughts and possible actions from the fund management fraternity, each one jostling to stand out above the rest.

  • Funds have investment mandates, they must always be invested

Public offer funds all have investment mandates. A mandate is an instruction set forth at the time of inception of the fund which determines how the money is invested. Now, these mandates are overseen by the fund trustee, whose sole purpose is to act as an independent arbiter ensuring investment strategy within the fund actually reflects its mandate.

The mandate stipulates the number of fund assets that must remain invested at all times. Usually, around 95%, with the remainder allocated for ongoing redemptions and any tactical investment decisions.

As a result, a manager can’t liquidate their portfolio and go to cash. For them, defensive actions must rely on moving portions of the portfolio into what are euphemistically termed ‘defensive assets’ These are the shares with strong cash flow,  low growth profiles and strong dividend yield. But as Markowitz described in his Modern Portfolio Theory, there will be events that cannot be diversified away no matter how hard you try.

And a global pandemic sure is one of those. Making the moving of funds into so-called defensive assets pretty much akin to moving the deck chairs on the Titanic. It creates a distraction but certainly doesn’t solve a problem. Which means all managed investments, no matter how many defensive assets they own, will always take a major hit when confronted by major events.

Many, many times, I have been asked by clients over the years, “Why am I paying fees to a manager whilst I am still losing 40% of my investment?” A very good question. The answer, “blame the mandate” 

But contrast this with the long term investor. They don’t need any euphemistically titled shares. If they deem the market to be risky they have the option to immediately liquidate all or some of a portfolio. A decision they alone make; depending on circumstance, investment time frame and most certainly their state of mind regarding how future events may play themselves out. They are certainly not bound by an investment mandate dictating their actions!

And that’s why you’ll notice a common thread from our ‘market sages’ about always staying invested. No one can time the market we always hear. And as easy as it is to get out, it’s the getting back in that can be very difficult. And how many more times do we need to hear that we’ll certainly miss the start of any rally should we have gone to cash?

Remember our fund manager brethren have a great deal riding on the fact that we always stay invested in their fund. They clip the ticket at 1% whether they make a return or a loss on our money. Therefore, just as long as we stay in, they make money. A pretty good reason to devote their energies to keep us in!

So any, and I do mean any advice proffered by them is always going to be skewed towards just that result? Their spiel will always revolve around remain in the fund at all costs. So any public utterances they make will always, and without exception, focus on staying the course and holding the line!

A long term investor, on the other hand, makes up their own mind and acts accordingly – there is absolutely no right or wrong actions for them, only what is appropriate to their investment objectives. They don’t have to ‘talk up their book’ so to speak and flooding the world with ‘salutary’ warnings as do fund managers.

So, you can see that the professional money manager works under a completely different set of values than does a long term retail investor. And as such their opinions and utterances are geared towards self-interest. And if you needed proof, just read this article published only a few days ago.

It’s all about managed funds and their current returns in this coronavirus era. They have fallen sharply, no surprise there of course.

Of interest, the managers interviewed, hold completely differing viewpoints as to what is occurring. One fund manager covers his bad performance with all the new opportunities at the moment and is buying up big. Whilst the other sprouts the fact that markets will definitely be testing their March lows again. So is ‘ keeping their powder dry’!

Polar opposite views, from members of the same industry, both using a semblance of intelligent veneer, which they have glued over an event they have absolutely no idea about. (That is unless they were around managing money during the last centuries Spanish flu crisis!)

And there are plenty of further examples just like this one. In fact, check this post I did a couple of years back discussing a major fund manager who decided to return funds back to investors. It astounded me then, it astounds me still today and it will remain astounding for the absolute bullshit it delivered!

Oh, and if you needed proof about the need for sensationalism journalism to attract readership, check this article out. Written by a much esteemed Australian finance journalist, it is an absolutely honest expose of what actually passes as valid information. I can assure you after reading this you will never again rely on a journalist’s opinion to guide your investing.

Finally, what actually was meant as a quickfire post on the need to ignore all the noise surrounding current events, has actually turned into a bit of a rave! I hope you can immerse yourself in all the words and take from it the lesson which is always the same here on Investor Tuition.

That lesson being long term investors buy an income for the future by investing in businesses that can both sustain and grow that income. If you can pick up good valued stock with a strong balance sheet, particularly low in debt, then getting into the market currently isn’t such a bad thing.

Short term speculating is for professional managers, therefore totally ignore their input as it represents nothing more than utterances for the sake of uttering something. There is absolutely nothing that can be learned from them that will improve your investing.

Don’t listen to the noise and most certainly don’t ever be tempted to act in accordance with it until you have done your own due diligence in terms of your investing goals.

I hope you enjoyed reading; the next post will be about three strategies that can be used during times like this to take your portfolio through to the next boom times.

So share this post with your friends and let’s get some differing opinion. Your comments are very welcome and that goes for dissenting ones as well!

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Postscript – 9 June 2020

And just to add further proof, here’s a much-esteemed fund manager recanting his dire warnings of imminent market collapse barely 2 weeks previously! These guys attempt to create what appears to be knowledgeable news but are actually contributing nothing more than made up hyperbole!

Far too cautious’: Legendary investor misses out on Wall Street rally

And without citing specifics (just do a google search) the predictions are flowing thick and fast. And still roughly divided between ‘massive falls to come’ and ‘this time it’s different’ – the new bull market! So come to your own conclusions rather than follow these ‘experts’ who are only ever offering up opinion and never any guarantees

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