So what now?
What a roller-coaster! It feels like just a few weeks ago (because it was) that we were staring into the market abyss with global markets falling 35-40% in just a matter of 18 trading days. This sent the VIX index (which measures volatility/uncertainty in the market) to highs not seen since 2008. But just as quickly, we saw a rebound that whipsawed the market so hard that people wondered if the virus was just a figment of their imagination. As of this writing (10th May), the S&P 500 is up 31% from its lows with fortunes created (hey we told you not to let fear guide you) just as quickly they were lost.
S&P 500 Chart - V Shaped Recovery?
With most investors’ heads still spinning, they keep asking what now? While we have our points of view on what the future holds, and we’re discussing those with our clients, our predictions are not really relevant. Just like everyone else, all we can do is make our best guess. As one of the hedge-fund managers we follow put it best: “I have spent enough time over the past six weeks reading about viruses, viral transmission rates, curve flattening, herd immunity, stimulus plans, processes for reopening the economy, immunizations, virus reacceleration in the fall, testing protocols, testing bottlenecks, and social distancing effectiveness to last 10 lifetimes. I have studied myriad models and their inputs and outputs, and, at the end of all of this, I am in the same place as everybody else: I don’t really know.”
So in the face of all the uncertainty, how does one invest? Well below, we’ll take a look at a few techniques to mentally tackle this market and then we’ll get into what we’ve been recommending to our clients.
Mental Techniques to use:
Forget about Market Rationality: This rally is often described as “the most hated rally ever” (actually this is just the latest one; we have had many “most hated rallies ever” in the past). Market participants cannot fathom how, after world economies came to a standstill for months, healthcare systems overrun, thousands of deaths, and hundreds of millions of jobs lost, global equity markets are only 10-12% off their peak. People feel this is a fed-pumped-FOMO-driven-FAANG-dependent-bear-market-bull-run, and are quite upset about it (not sure if they are upset that the bargains are gone or that they missed out totally). If you’re feeling this way, you have to remember the market does not owe you any sort of rationality (especially in the short-term). Wondering how and why the market is so irrational is in itself irrational as any reasons you come with are just guesses. So assume the market is irrational (for now) and use it to your advantage.
Don’t time the market, focus on value: We will continue to shout this our faces are blue. If you are a long-term investor, trying to time the markets is a fool’s errand. Instead, focus on value. If you think a certain asset is really valuable at its current price, buy it. It’s the height of silliness to think you’re going to wait as it could fall further. Put it another way, say you regularly buy a certain type of wine and you walk into the store and see it’s 30% off, you would stock up. You are unlikely to say, “No I won’t buy, they could have a bigger sale next week”. On the other hand if you think an asset is overpriced, don’t buy it. Could you miss out if the price rallies? Of course, but you have to learn to live with that. The key is to focus on the value of the asset you are getting versus the price you are paying.
Control your emotions: One of the key things we try and observe when we invest in a fund is the manager’s temperament. But temperament is equally important for the average investor. Time and time again we see that some of the smartest people we know are terrible investors because they can’t get a grip of their emotions. Case in point – Isaac Newton who is arguably the smartest person that ever lived, was a terrible investor. After making a huge profit in the South Sea company, he jumped back in after prices skyrocketed (FOMO existed back then too) and ended up losing nearly 3x his profits[1]. Self-realization is paramount in investing, and if you feel you cannot control those emotions it’s important that you outsource your money management to someone who can (no this is not a shameless pitch for our services… or is it?). The constant push back we get on the controlling your emotions point is that it’s “easier said than done.” Well yes, if it was easy everyone would be making money hand over fist. If you have some money in cash and the market runs up will you feel regret about not spending it all? Yes. If you invest and the market falls will you feel regret? Yes. The real question you have to ask yourself is what would you prefer – to invest too early or to miss out? It’s an important question you must answer for yourself.
Our Recommendations:
Below is what we’ve been talking to our clients about, and where we’ve been focusing our energy for the time being. We typically take a long-term (several year) investment horizon, so none of the below is targeted toward quick gains (although we have captured significant gains in the market rally). Do note: the below should not be construed as investment advice, please do your own research before investing, all investment carries risk including the risk of permanent capital loss.
What we like/Where we see value:
Small caps: Very volatile, and earnings uncertainty make valuations difficult, but prices are at levels not seen for several years. Specifically, we like the restaurant PoS space, where growth has shown a lot of resilience for enterprise focused companies but been equally brutal for SME focused companies.
Emerging Market e-commerce and bank stocks: Not all are created (read: operated) equal, you need to find the diamonds in the rough where growth and/or balance sheets are still robust.
Payment Space: We are seeing rapid growth due to online spending and merchants trying to find new ways to reach customers with brick and mortar shut down for the moment. We especially like a relatively new entrant into the space that is turning the concept of credit on its head. That said, we recommended our clients enter this a few weeks back, and since then value is a lot less clear due to the swift run-up (~60%) in the price.
Concentrated funds: We believe, for a number of reasons, that it’s important to have at least some of your capital allocated towards funds that have the potential of outperforming the market over the long-term. Ideally, we think these funds should be concentrated and have 7-15 positions. One of the funds we’ve recommended to investors, and one where at one point we had 25% of our liquid net-worth in, has returned 50% YTD.
What we don’t like/Where we don’t see value
Fixed Income in general: With interest rates so low and so much uncertainty priced in, it doesn’t seem like there’s much upside here, so we’re recommending selling out and holding cash to buy into equity markets when you see value (unless you need the cash-flow).
A lot of large cap names: While there are several shades of grey here (not all large-caps are equal!), in general prices are back to levels like in mid- to late- 2019, and since we weren’t buyers then when outlook was very positive, we won’t be buyers now when the outlook was very uncertain (that said, we’re not necessarily sellers either).
Pure Retail REITs: There aren’t too many of these left in the Singapore market, as several have or will merge with other REITs, but the timing and structure of re-opening is very unclear. We do feel churn will be significantly higher than usual as leases come up for renewal, and rental revision will be severely under pressure.
While we fully admit that these last few weeks have been trying and the velocity of change has made investing difficult, we do believe there are a couple of core ways to invest in all markets. We also hope that our recommendations give you some sort of direction on where to look when investing.
That’s it from us, happy investing and as usual – stay safe!