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The risk of selling low

Investors are flocking to safety.

The premise of investing is simple: buy low and sell high to earn a return. In practice, however, it is far more difficult.

How we are wired as humans makes it hard for us to set aside our emotions as investors.

Buying when security prices are low due to pervasive pessimism goes against our inherent preference to play it safe, while selling when markets are rising is equally tough because of the temptation to hold out for even greater gains.

So most investors end up doing the exact opposite: they exit their investments at market lows in a bid for safety, and reinvest once markets have already run. Not only does this crystallise their losses, it also means missing out on market recoveries.

Rare opportunity set

Given the prolonged and heightened uncertainty investors are currently facing, it is useful to take a step back and re-evaluate the rare opportunity set current conditions are presenting.

A flight to perceived safety is evident locally and abroad.

Figures released by the Association for Savings and Investment South Africa (Asisa) for the quarter and year ended June 2019 show that South African interest-bearing portfolios attracted the bulk of net annual industry inflows, followed by money market portfolios. South African multi-asset income portfolios were also popular with investors.

On the flipside, equities have lost much of their appeal, with the South African equity-general category recording net outflows. Asisa notes that “investors continue to favour the perceived safety of interest-bearing portfolios, which is not surprising given the market volatility and political uncertainty over the past year”.

In markets such as the US, the ‘flight to safety’ has been into the market darlings, with investors chasing strong performance from growth stocks and technology counters despite high valuation levels.

While it may feel uncomfortable, markets are presenting the potential to buy low.

As we have noted over recent months, markets globally continue to be characterised by wide divergences: valuations of higher-quality, defensive companies are generally elevated, while valuations in parts of the markets characterised by fear and uncertainty are depressed.

Locally, while the FTSE/JSE All Share Index (Alsi) has delivered a total return of 4% year to date (to August 26), this has been driven by a handful of counters, primarily mining shares and large-cap rand hedges. In fact, we estimate that over 80% of Alsi stocks are in a bear market – in other words, trading at more than 20% below their five-year highs.

Globally, US investment management firm Pzena recently noted that the valuation dispersion between the cheapest and most expensive developed market stocks surpasses 99% of the monthly observations in the 45-year history of its data.

Starting valuations are critical to long-term outcomes

Such extreme valuation divergences are rare and present risks as well as opportunities. Investors seeking a smoother ride by switching to cash or buying high quality counters at any cost may find that this ‘fail safe’ proves to be the opposite over the longer term. Missing out on the gains from a market recovery can dramatically erode an investment outcome. Similarly, buying securities at lofty valuations underpinned by high growth expectations may result in losses if expectations prove to be unsustainable.

In contrast, areas in which valuations have been driven lower due to fear and uncertainty present the potential for mispricing. Where prices fall across the board – an entire sector or geography, for example – quality securities become available cheaply, along with the rest. Tainted by pessimism, their earnings potential is easily overlooked. While it may take time for the market to realise mispriced value, investors who can ride out the storm stand to generate outsized returns from such attractive entry points.

Anet Ahern is CEO of PSG Asset Management.

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COMMENTS   15

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What a surprise…not! Another article based on hot air.

@Anet Ahern:

Would you please provide us readers with actual fact based arguments about where you see this so called future “market recovery”.
You say “Missing out on the gains from a market recovery can dramatically erode an investment outcome”. I agree with this statement, but I have to ask, do you see anything and I mean anything concrete that points towards a market recovery that is coming to South Africa and the JSE?

You also make the following statement:
“Tainted by pessimism, their earnings potential is easily overlooked. While it may take time for the market to realise mispriced value, investors who can ride out the storm stand to generate outsized returns from such attractive entry points.”

All I will say about this is I’ll be a realistic pessimist with a smile on my face while I sleep soundly at night while I’m invested in markets where I don’t have to “ride out the storm” cause I have other hobbies where I get my fix for taking risks.

You’re welcome to keep writing what you want, but please sprinkle some concrete facts over your lovely literature in future so we can see what you see.

P.S. Wonder where you and your colleagues are invested in your personal capacities, bet you won’t share that with us.

All the best with your investment endeavours in South Africa, I’ll come and join you when (and if) the Titanic changes course.

The one thing you will always hear from asset managers whose livelihoods are dependent upon cash flows into their equity funds, is positive spin in any situation. There is no money to be made by adopting a pessimistic stance even if the investment conditions warrant it.

Beware of fund managers bearing good news

Exactly. Just like an estate agent would never tell you not to buy a house now, rather wait a few years.

I have seen so-called pros who panic-sell (or panic-buy) due to heightened emotions. It is a very, very, very real thing. This article is sound advice; this advice is way better and more useful than any (useless and incorrect) prediction about the economy could be. The only thing an investor can do is remain rational and avoid panic, no matter what.

If you want to know about the direction of the economy you’d have to ask those pulling the strings, those who run central banks (private entities that have the objective of keeping nations in catastrophic debt and financially repressed). No point badgering a financial markets professional. Most of them are dupes who think that the financial markets infrastructure is a legitimate ecosystem of pricing mechanisms and they believe that these are all mostly un-manipulated. Only those nearer the top of the hierarchy are aware of the farce.

It is funny that you humorously refer to the Titanic; you probably aren’t aware that a ship called the Olympic was damaged in 1911. Its twin was built in 1912 (named Olympic), with the original, damaged vessel renamed to Titanic. The original Olympic (then, Titanic) set out to sail in 1912, and there was always the intention that it would crash. On the ship were a number of highly-ranking officials who were set to meet and oppose the formation of the US Federal Reserve. Amongst those who missed the voyage due to “illness” were family of J.P. Morgan and others, who were miraculously pictured on holiday elsewhere at the time of the voyage. That is how the Federal Reserve was allowed to come about. Conveniently, a ton of insurance money was also collected upon the crash of the Titanic (i.e. the original Olympic), which had been running at financial losses.

Put that in your pipe and smoke it, boet. Oh wait… no, you can’t, because you have to watch the rugby later.

He who panics first panics best! Make sure you are next to the exit when the music stops. This ‘market’ could take decades to recover from the next collapse. See Japan for insight.

@Oubok true! As long as the panic is warranted, and not at every turn as I’ve seen happen. And as long as dont buy back 50% higher. Maar rerig gee ek nie om nie. Ek day-trade. All I want is that sweet, sweet volatility…doesn’t matter which way it goes. Was mainly saying there’s no point asking a market “pro” what the economy is going to do…they know jacksh1t. Their jobs are basically about knowing some terms so that they can fool non-investors into thinking they know what they’re doing. Oo could I tell you some industry stories! 😀 😀 but I wont 😉

don’t catch a falling knife. i sold all my steinhoff at R10 after a 90% drop; if you bought at R10 you are now 90% down.

Why thank you, captain obvious, for educating us that 90% of R10 is R1 😉

On a serious note, I take it you merely sold vanilla at a huge loss, and didn’t actually go short? (No lying permitted, or else your nose will grow, like Pinocchio)

That 90% of R10 is *R9

PSGs unit trust investors are probably feeling a little bit uncomfortable right now. The PSG equity fund suffered a decline of 19.4% for the 12 months to the end of August 2019. The PSG Balanced and PSG Stable also made the list of 5 worst performing funds over 12 months for their respective categories.
I tend to agree with the general thrust of the article although I would not consider South Africa a great bargain as yet.

Forgive me, but for me a huge problem is that for many many South Africans, including me, a huge chunk of our investments lies in your pension fund and there is absolutely nothing you can do to touch that money to diversify as you wish and you are in the hands of the administrators that are governed by law that they may only invest 30%? Off shore,so for as long as you are working and contributing to a company pension fund you are stuck with most of your money bring invested in SA…..

@Paull

It sure is a very unfortunate situation to sit with if one has investments in the pension fund system in South Africa. The so called prescribed assets that are proposed by the ANC is just going to be taking the already applied prescriptions under Regulation 28 to the next level. People in retirement funds already don’t have the freedom to allocate larger portions of their investments to equity and overseas exposure, now they will just force you into a worse situation.

Who wants Eskom bonds? What happens when the SOE’s go bust? Your retirement fund equals zero?

I feel the bright side (you might not agree) is that you still do have choices you can make to get your funds (or some of your funds) out of these pension funds.

“If you are a member of an employer pension or provident fund before normal retirement age and decide to emigrate, you may withdraw your benefit. There is no restriction.”

“A member of an RA fund is not usually allowed to withdraw from an RA before the age of 55, and on retirement, is only permitted one third of the benefit in cash. The rest must be used to buy a pension. An exception applies if you officially emigrate or relocate on the expiry of a temporary resident visa. In this case, you may withdraw the full capital amount.”

If you don’t have any choices at all, then it’s really bad, but please, I’m not saying these are lovely choices to have, they suck to be honest, but you still have them.

Of course this goes without saying nobody can tell you what to do (or rather the ANC might later when they get their wishes, but we are no there yet).
You need to weigh up your options and make decisions that you feel is the best suited to your situation. Be that choice to leave things as they are, to withdraw the one third or emigrating and withdrawing everything.

Please just remember this, not choosing is a choice.

All the best of luck with your choices and the future!

I truly hope whatever choice you make, when you reflect on it in the future that you always feel it was the best choice you could have made at that point in time with the information you had.

I don’t invest with fund managers and I am not a broker.

I have to agree with the article. The extent of bad news that has been priced into emerging markets (including RSA) is very strong – this presents a significant margin of safety (actually) and a large amount of potential upside. On the other hand, if you look at developed global markets (particularly the USA), it is well set up for a strong decline because of the opposite there. I think the problem is that everyone generally agrees with “buy low, sell high”, but miss the important point that buying low will feel uncomfortable and it will go against the momentum/sentiment of the day.

If you look at all the bad news and pessimism, the thing to do is not to complain about / emphasise the bad news further, but rather to ask the question of to what extent the bad news has been priced into the market. If it is priced in more than it should be, you should buy within your own risk appetite. It is hard to argue that certain companies aren’t silly cheap at the moment due to sentiment. As the article states, many sell/buy an emerging market asset class as a whole – this means they sell the good and the bad within the market, and this is where great opportunities can come from.

I saw a comment about someone saying they lost a lot of money when the bought Steinhoff after it dropped significantly. If you bought at that point you were gambling (not investing), because there was not enough information available to make a sound call at that time around Steinhoff.

@Johan_V

I agree (to an extent) with what you’re saying about the risk and bad news being priced in, and if one does buy, to then buy ‘within your own risk appetite’, could not agree more with this!

I just can’t help and ask, what about someone that looked at Steinhoff in the spring of 2017 when they were in the +-R50 bracket, was the fall from the +-R90 high because bad news was priced in?

So my devil’s advocate question I guess is, what happens when the 6th of December 2017 repeats itself?
So the question is can you really determine with all the possible things we know (and don’t know) with regards to things in SA like the politics, SOE’s and the economy where the ZAR and the JSE might drop to?

Personally I don’t have the risk appetite to gamble, I do see it as a gamble, in the markets of countries like South Africa, Argentina, Venezuela or Zimbabwe and even some of the BRICS countries.

Those who do have that risk appetite for that, I can just wish them well cause the world needs them as well, but I won’t be joining them unfortunately. I’ll be taking my risks someplace else.

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