Investment Matters

Did you sell everything?

Did you 'Sell Everything?'

I vividly recall being on Christmas break last year and reading widely in Australian and global news services a report from Royal Bank of Scotland (a large UK bank).  The Australian Financial Review headline was “RBS tells investors sell everything” [1].  It was printed on my birthday.  Happy birthday to me! It was a huge story at the time and was widely picked up.

Obviously fast forward and the year hasn’t turned out to be quite so cataclysmic.  That is despite many unpredicted things being thrown at the market, of course.  Imagine if RBS had known of Brexit and Trump!

So far this year the major global markets are up to the tune of between +10.4% (both S&P 500 and FTSE), to at worst +2.4% (China).  The ASX is up +5.2%, and these numbers are all before the various dividends paid in the markets.  Selling everything would have been a poor strategy, in hindsight.

Whilst there are any number of smart, analytical well credentialed people who look at and call markets, the reality is that markets are, in the short term, emotional.  This makes short term mathematical forecasting virtually worthless, or at least pointless.  Who is to properly explain how our collective emotions change and evolve, and who can predict it? Certainly not the PhD in Finance and Astrophysics from Harvard.

What is more interesting to your Investment Team is that First Samuel will exit this year with virtually polar opposite sentiments from the popular financial press.  In fact, even some of the most bearish forecasters (like Harry Dent) have offered mea culpas on the market and think this rally “Looks Real”.

Who knows!

What I do know for sure is that while the market moves in emotional cycles in the short to medium term, in the long term, it moves with the fundamentals of the constituent businesses that make it up (i.e. if your earnings grow over the long term, so will the value of your business, in the end). That is why we focus on the long term fundamentals of what we are buying.  Not the noise around it.

I have created this pictorial representation of how I have observed the emotions of the market over time.



Given the GFC experience, the emotions of Panic, Fear and Depression (shown in the chart) have remained large in people’s minds.  I feel this might go some way to explaining why some seven years into an almost unrelentingly positive market we have yet to see the raging emotions of Thrill and Euphoria hit markets. People are simply still bearing the scars of the “great recession”.

This is notwithstanding that markets have ground their way to fair, and in some cases to above, fair value (that is, above the long-term P/E average).  It has truly been, as some have noted, the most hated bull market of all time (and now almost one of the longest).

With the current swift move upwards post the Trump election (with no real change in economic reality), we are finally seeing an element of Optimism and Excitement creep into markets.  This is for the first time since the mid 2000s, and it is in this regard that we believe the relative lack of concern about markets should give pause to most sensible investors.  Where art thou, RBS?

That being said, it should be stated that this move has only been very recent, and the base (depending on how fast US earnings pick up off the oil-price-beaten lows) could be lower than people currently realise (i.e. the markets may not be as expensive as people “think” they are currently).

It is my experience that these updrafts are unpredictable (in fact more so than the down ones), and can last for a while. Those that miss them can face a long period of regret, and will need to be very disciplined to keep to their strategies (not like Isaac Newton who re-entered the Tulip bubble after first exiting due to regret, and seeing his friends making so much money; and then lost everything).

For First Samuel, on behalf of its clients, we will simply stay focused on the opportunities in front of us, and make sure they make sense for our clients in order to meet their long term wealth goals.

Given the opportunities available at this stage, we will likely retain a defensive stance.  And focus on the investment opportunities we can control and know to be good, regardless of broader market conditions (like turnaround situations, small growth companies, and demographic winners). 

It may make us look different to others for a while longer, but we would prefer to try and stay away from the unpredictable nature of the markets emotions at these values! 

And so, as we exit 2016, remember the "sell everything" call.  And be pleased that First Samuel didn't.  And that our clients' Australian share portfolios returned over 20%.

Next year may not be as good.  The updraft might continue.  But only time will tell.


[1] Australian Financial Review 12-Jan-16:  The Royal Bank of Scotland (RBS) has advised clients to brace for a "cataclysmic year" and a global deflationary crisis, warning that the major stock markets could fall by a fifth and oil may reach $US16 a barrel.  The bank's credit team said markets are flashing the same stress alerts as they did before the Lehman crisis in 2008.  "Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small," it said in a client note.