Investor panic could lead to financial loss
While the hype around the volatility in local and global stock markets has served to highlight the importance of risk management and capital protection to investors, Daniel Malan, Investment Director at RE:CM, says these principles should instead be a primary concern at all times.
“Uncertainty, volatility and complexity is always present in investment markets. It is not unique or rare in some way and it does not ‘rear its head’ like some kind of scary monster. The fact is that positive and negative price movements are common occurrences over time and should be expected by anyone involved in the markets. It would serve investors well to focus on protecting their purchasing power in real terms,” says Malan.
He says it is important for investors to form convictions purely on evidenced outcomes. “In this regard, the evidence suggests to us that the best two ways to deal with uncertainty and an unknowable future is to allocate capital predominantly to high quality businesses with sustainable pricing power, and to only buy them when they are cheap. If an investor consistently followed this basic but powerful investment discipline they would be able to sleep much better at night.”
He says however, that investors who may not have followed these principles should be cautious about making changes to their investment portfolios in reaction to the recent market shocks.
“One of the biggest mistakes an investor can make is to panic and sell an asset they don’t know the value of for fear that it may decline further, as they would then lock in their losses and forgo the possibility of a rise in price in future. Generally speaking, if one acts in the markets without having done your homework, one tends to repeatedly make mistakes.”
He says there is still a lot of uncertainty around whether the recent market downturn is a prelude to another recession. “We just don’t know, but the good news is that no-one else does either. We believe that owning a reasonably diversified collection of cheap, high quality businesses with demonstrable pricing power through full business cycles is sufficient ammunition to weather any set of economic conditions.”
