During the past few weeks, I have been struck by a few interesting extremes. As an avid fan of audio books to ease my commute to work, I was alerted to a new book available in audio format called Think!: Why Crucial Decisions Can't Be Made in the Blink of an Eye by Michael LeGault (Threshold Editions, January 2006), which claims that the best decision-making still relies on thorough contemplation. This follows the success of Blink(by Malcolm Gladwell, Little Brown & Company, January 2005), which professed that trusting experience-based intuition to expedite making what appear to be snap decisions is the way to go when facing complicated choices.
I was also given a novel called e, by Matthew Beaumont (Plume, October 2000), which consists entirely of emails. Contrasting starkly with this mode of writing and living, I was reminded of the practice of the re-drafting of a letter to perfection before sending for a messenger on horseback to deliver the final, flawless version to the recipient - typical of the period of Pride and Prejudice, the film version of which is currently on circuit.
Next, I received a newsletter from Hermes Asset Management ( www.hermes.co.za) entitled Don't try this at home, which reminds investors that a bull market easily masks the intricacy of thought and seriousness that investing in the stock market warrants. Hermes aptly points out that almost anyone who owned a property in South Africa in the past three years has seen a good return, which does not make a property guru out of the average homeowner.
Finally, my eye caught yet another self-help investment book (I have a weakness for books, audio and otherwise) called The Little Book That Beats The Market(Wiley, November 2005) in which Joel Greenblatt tells you, in a mere three hours, how to beat the stock market.
After all, Greenblatt and his firm have done this successfully for over 20 years. Greenblatt is the founder and managing partner of Gotham Capital, a private investment partnership that has achieved annualised returns of 40 percent since its inception in 1985.
And now Greenblatt is going to make even more money out of sharing his philosophy. At least his investment approach seems to be based on long-term value. Not having read the entire book, my guess would be that while the title may sell the book, the long-term nature of Greenblatt's approach will not be so easily adopted by today's instant-gratification-generation of investors.
At times the stock market will entice the non-professional investor with the promise of easy returns. This usually happens at the advanced stage of a bull market and is tempting especially to those who have not participated in the super returns of the recent past.
The tidal wave of momentum is very strong. In Scripline of January 14 this year, I highlighted the power of momentum and the danger of selling shares simply because they have appreciated substantially.
Investors lose perspective
However, when a bull trend gains speed, the following can also be observed:
- Investors will turn their focus to bargain-hunting - in other words, looking for shares that have lagged the market. Certain sectors of the market may remain clear winners, as resource shares were last year, but at some point investors will put some money into shares that have not yet moved up. This will cause these shares to rise as well, even if not to the same extent as the shares in the winning sectors. Hence the expression "a rising tide lifts all ships".
While some of the resultant buying into shares that lag the market may be justified by the valuations of the shares in question, it is fair to say that some indiscriminate buying also takes place. Once the market resumes a more normal trend, usually after a pull-back or temporary decline, shares that never offered real value will under-perform the market again.
- Phrases such as "super cycle" and "it's different this time" and subtle adjustments to the discount rate (an important input into the valuation of a share based on future cash flows related to an investment in the share) become all too common. Investors like to project the familiar, finding and even manufacturing apparently logical reasons that support the current market level and justify it moving up even further.
- Everyone becomes an expert. Suddenly the thought of paying a professional to "shoot fish in a barrel" seems ludicrous. And borrowing to invest seems an obvious choice.
In my opinion, a mature bull market has among its motives a sinister one: to lure the unsuspecting into believing that investing in the stock market is easy, involves little risk and can be done by setting aside the basic principles of understanding companies, their financials and their valuations.
Follow this advice
In Scripline of December 10 last year, I included the following advice, which I think bears repeating along with some additional points:
- Be realistic about the effort you are able to put into your investment portfolio, taking into account your current and likely future circumstances.
Although having time on your hands does not necessarily result in making better decisions, the converse is often true, especially if you are not focused on investments on a day-to-day basis.
A few well-contemplated decisions are infinitely better than flying by the seat of your pants when it comes to looking after your money.
- Whether you involve a professional or not, you will have to spend some time ascertaining your own financial needs, and this is an aspect of the investment process in which you are well qualified to participate.
- If you are investing yourself, most of your effort should go into establishing the portfolio. If time is limited, use diversification to ensure that you are participating in most areas of performance most of the time.
The average investor's experience of switching between specialist funds and sectors has certainly not been a financially rewarding one.
Although it is possible to be a successful investor on the basis of spending little time on in-depth thinking and having a superficial understanding of investments, the risk of failure is high.
It's a bit like expecting to get a washboard stomach by exercising for 10 minutes a day using some contraption advertised on an infomercial.
On the other hand, there are professional investors who can amaze you with their sharp, quick and incisive assessments of investments. This ability (dubbed by some as gut feel or intuition) usually stems from extensive involvement in the market through more than one cycle, with "school fees" paid along the way as they learn from mistakes.
After a rather scary pullback, the JSE has bounced neatly off the 18 600 support level and seems well on its way again. However, just because the bull market seems intact, it does not follow that investing has become easy.
Solid investing still requires a consistent process and a lot of thought.
- Anet Ahern is the chief executive of Sanlam Multi-manager International