We are regularly asked to comment on short term share price movements, short term outlooks and if it is a good time to invest in, or divest from, equities.
Equities are a long-term investment. Our view is that investment time horizons should be greater than five years; equity investors should always be prepared for volatility over short-term time horizons. Within our equity strategies we aim to hold companies that are of high quality with strong market positions. We tend to hold few companies that are cyclically exposed. Historically at times of significant market falls, for example the dot.com collapse at the beginning of the millennium and the global financial crisis now over a decade ago, quality companies have tended to fare better than the rest of the stock market.
A long-run view on equities
For us, investing in equities means ownership of portions of businesses. Our ethos is not one of a brief holding of a collection of tickers but of ownership of real businesses thus providing our clients with the economic benefits that these give. While speculation may be successful from time to time, this does not play a role in our fundamental approach.
We are of course conscious of the short-term performance of our holdings. Paying too much attention to the score board though is unhelpful and we believe we are better served in focusing on our core competencies of stock analysis and selection. An understanding of the macro environment does provide us with an outlook for different sectors and geographies.
The yield curve has inverted in the United States. Historically this has been one of a number of indicators of stock market peaks. A multitude of other factors continue to provide grounds for optimism however:
- employment has not peaked
- we have yet to see exuberant levels of mergers and acquisitions
- earnings revisions have not been particularly negative
- inflation looks benign and market valuations do not look overly stretched.
As described well by Collaborative’s Morgan Housel, “pessimism is intellectually seductive in a way optimism only wishes it could be”. In other words people generally pay more attention to commentators highlighting dangers than those suggesting everything is going to be fine. There are many things to be worried about for the global economy. To name a few: the US– China trade spat, a prospective war over Kashmir, Brexit, the Hong Kong unrest, climate change, countries with unsustainable debt and a global economic slowdown. There is however always something to worry about. Given that equities have empirically provided superior economic returns over all long-run time periods is it really now time to think that “this time it’s different”?
Yeah, yeah, yeah but what is going to happen in the short-term?
On a recent trip to visit clients my mind couldn’t help coming up with a different analogy in each meeting to try and help describe what we do. So here is a current example I could use. It has been pouring with rain here, at our international base in Jersey, and the sky currently looks a little threatening. There is washing at home that needs drying, though my family and I have plenty of clothes for the rest of the week. Hanging the clothes outside on the drying line if I think a downpour will arrive this evening would be crazy – though of course, over time the clothes will get dry eventually. The weather forecast is for around a 10% chance of rain tonight. I’m willing to accept the risk given I have a long time horizon. Hanging out a third or half of the washing might provide some regret minimisation but my analogy falls down here as I don’t want heaps of wet clothes in the house.
We do not see the current fall as the start of a horrendous bear market.
Timing the market in the short-term is difficult and in fact has been shown to be significantly more difficult than weather forecasting. Regard people with suspicion that say that they can do it. That said, we do not see the current fall as the start of a horrendous bear market. A “buy on the dips” strategy would seem sensible in our view.
What if we are wrong?
As mentioned above the types of companies that we invest in tend to fall less than the market in market downturns. Of course clients cannot eat negative absolute returns but positive relative returns ought to provide some comfort.
Approaching equity investing
To reiterate our view. Equity investing has to be considered as being long-term. If clients are prone to panic they ought to consider another asset class, for instance a growth focussed multi asset strategy, or alternatively have a rule based approach for implementing stop losses and a rule based approach for reinvesting. An investment manager with strong equity experience will partner with clients to guide them through stormy markets by adopting a phased approach to allocating fresh funds to equities. This will ultimately help provide clients with regret minimisation.