3rd June 2013
At Mindful Money, we think the following may be particularly appropriate given the current uncertain state of equity and bond markets globally.
Below Tom Becket, Chief Investment Officer, Psigma Investment Management considers the sorts of mistakes investors can make complete with one or two excellent quotes from a few other experts – though not experts from this era.
“Any man can make mistakes, but only an idiot persists in his error.”
“Last week I was asked by a journalist about the key mistakes that an investor might make and lessons that should be learned from such misdemeanours. Obviously being pretty much perfect (note massive sarcasm) I struggled to come up with any sensible suggestions, but here below are the classic mistakes that have caused pointed fingers and sleepless nights in the last few years.
“The key lesson that I have learnt in my career is that just because something looks cheap, it doesn’t mean it can’t get cheaper. Beware the value traps! Every investor goes through a period of losing fingers catching falling knives and for me this was in Japan. As Keynes said, “the market can be irrational longer than you can stay solvent”. At the start of 2011 we started to aggressively build Japanese equity positions believing the market was outstandingly cheap. Sadly we were then hit by the Tōhoku earthquake and another 18 months of dire economic performance and falling markets. The key lesson would be to always expect the unexpected in asset markets, but also to ensure that you have a diversified portfolio. Do not allow any one risk to be a dominating influence on either volatility or performance, regardless of how cheap an investment might look.
“Another key lesson that I have learnt is to not fight the Central Banks. Listen to what they tell you, such as the lead-in period to Jean-Claude “la clune” Trichet’s “surprise” rate hike in mid-2008, when the former ECB chief telegraphed to markets that he would raise rates and nobody believed him. You also shouldn’t fight their power, particularly when they are acting in unison, as they seemingly are now. We have been guilty of selling assets too early believing that the Central Bankers, in our case the Bank of England, were wrong in their pursuit of lower Gilt yields. Our mistake in selling Gilts too quickly was made in the expectation that investors would not allow negative real yields (sub-inflation returns) in safe haven bonds, even in a panic. Of course they did. The lesson to be learnt is that when panic sets in, anything is possible; sometimes it is best to cast off the shackles of valuation discipline and play the momentum game.
“The classic mistake made by investors and the one area that the journalist particularly wanted me to elaborate on is that of illiquidity. Many investors were trapped in property funds in 2008 and regularly suffer through the illiquidity of small cap equities and small investment trusts. The lesson would be to always scale your exposure and think about what might happen in an extreme market dislocation – will you be able to get out when you really need to?
“We are currently extremely worried about some of the behemoth corporate bond funds, which have grown to a huge swollen size and might not be able to provide the liquidity that investors expect, were the sentiment towards the asset class to change quickly. We would advise that an investor should never hold more than 10% of a balanced portfolio in assets that are non-readily realisable. We currently only invest in 2 funds that are not daily dealing (total combined exposure 4%) and believe we could sell more than 90% of assets on any given day. We would also advise any investor to check with the unit trust manager about prior liquidity constraints and seek advice from an investment professional if unsure.”