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Lessons for investors
after a topsy-turvy year

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SPW Contributors

Sanlam Private Wealth

After a roller-coaster year on global financial markets, with severe shocks and surprises rattling even seasoned investors, it’s a good time to take stock and reflect on both the challenges and opportunities this crazy year has presented. While hindsight is indeed twenty-twenty, there are important investment lessons we can learn – our investment professionals share their insights.

Craig Massey, Regional Manager and investment veteran

After almost 35 years as a stockbroker, one would think it shouldn’t be too hard to spot the pitfalls when investing in financial markets. However, even the most seasoned among us have learnt some hard lessons this year. During the market fallout at the end of the first quarter, I should have heeded the two old adages: ‘Don’t try to catch a falling knife’ and ‘Never say never’. But who would have thought we’d see the demise of a company like Intu Properties, an offshoot of First International Trust (then renamed Liberty International) founded by South African insurance industry doyen Donny Gordon?

Those of us, including myself, who bought the share thinking ‘it’s got to be good value at this price’ now know the error of our ways. Too much leverage proved to be the undoing of this company, as its debt covenants were breached by the mark-to-market value of its properties plunging due to an inability to collect rent from tenants. Its bankers weren’t prepared to extend any further funding, so it was forced into liquidation.

The lesson here is to be patient and delay buying a falling stock, or one that looks cheap by historical norms, until a bottom has been put in on the share price. Then wait for positive momentum in the share price before buying. Yes, you won’t buy at the bottom and will probably miss the first 10-20% of the upside, but what you will avoid is the permanent loss of your capital.

David Lerche, Senior Investment Analyst

My greatest lesson in 2020 was that the peak of a panic, as we had in March this year, is the time to add ‘riskiness’ to a portfolio. While the obvious first thought of investors when the market was crashing was to run to safety, this was the classic ‘crowded trade’, and the safer options thus became overpriced on a relative basis.

In contrast, moving towards an area where the rest of the market was uncomfortable provided attractive returns. This is evident in both the outperformance of equities relative to bonds since late March, as well as the outperformance of resources relative to the South African equity market.

Christiaan Bothma, Investment Analyst

Being confined to my home during the pandemic, I realised again just how the news of the day can shape our emotions and also our investment views. This in turn made me more aware of the importance of trying to distinguish the truly important news or events (the signals) from the sensationalist nonsense (the noise), and how critical this is in becoming a successful investor.

As a consequence, I’ve spent more time reading about human history and longer-term economic trends, and then trying to view recent events through the lenses of history. I found this to be extremely helpful in seeing the bigger picture (and keeping sane!) amid all the 2020 noise-feed.

Renier de Bruyn, Investment Analyst

When confronted with an economic crisis like we’ve had this year, instead of trying to pick the likely winner from the host of conflicting, emotional or overconfident predictions from market commentators, I’ve found it more useful to consult the history books to try and gain perspective on how crisis periods throughout history have unfolded. As Warren Buffett has been quoted: ‘In the business world, the rear-view mirror is always clearer than the windshield.’

I’ve discovered how inevitable and essential crises are to rebalance the excesses that tend to build up in any system. They do this by creating an environment where necessary but unpopular or difficult choices simply have to be made. In normal times, people or governments prefer to take the path of least resistance. It’s only during crisis periods that we are forced to reassess our patterns and values. There’s a greater openness to change and it forces us to unite behind a single purpose, even at the expense of personal liberties.

In history, these were times of strong, assertive leaders, innovation and long-lasting progress. Although uncomfortable to go through, many crises in the past have in fact preceded extended times of stability and renewed growth.

Riaan Gerber, Portfolio Manager

During a black swan event such as we’ve seen this year, investors experience much more information flow than usual, which creates more uncertainty than under normal circumstances. When uncertainty increases, so does the manner in which markets behave in pricing assets, and we experience severe volatility in a short space of time. As a professional investor, one needs to be very careful in how one reacts during these times. For me, the most important lessons are:

  • Remain committed to your investment philosophy and process – your long-term track record will be the proof of your success
  • Remind yourself daily not to let emotions influence your decision-making process – this is the hardest part, but you can only control what you know
  • Cut out the noise – there is a lot of it
  • Timing the market is extremely risky – either panic first or ride it out, but those who panic first and sell out of the market tend to get back in too late, missing out on the recovery of market prices, which can cost them dearly.

Nick Kunze, Portfolio Manager

Sitting in my spare room at the peak of lockdown, I was reminded of something a previous mentor said to me many years ago during the 1998 Asian Crisis: ‘In chaos, there is opportunity’ (actually the words of a Chinese general who lived in the Eastern Zhou period of Ancient China).

As with other major events such as the Great Depression and World War II, the COVID-19 pandemic has profoundly changed workplaces and the nature of work itself. Such events usually lead to the demise of some markets and businesses and the creation of others.

A good many stocks have had a terrible 2020 – major cruise lines like Norwegian and Carnival, a giant floating petri dish, have been hammered. Others, however, have soared. We’ve once again learnt that in times of crisis, extreme price movements are not uncommon – but it’s the extremes that usually tend to astound investors.

According to market historians, a market correction (a plunge of more than 20%) happens approximately every seven years. So my lesson learnt is to get my buy list ready for 2027.

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