Fight or flight.

When confronted by danger, the human condition – developed over thousands of years – is to either fight or run away. It is not natural for us to act calmly and with compassion under those circumstances. It is therefore not surprising to see investors exhibit these reactions when there is a sudden drop in the value of their investments. They become fearful and  vicious.

For the past nine years we have seen a gradual and serene increase in the value of our investments. We have accepted this state of bliss without apprehension, listening to the media announcing a new all-time high on the world stock markets almost daily. But then we wake up one morning and the market is acting like a flock of birds taking flight after having been triggered by one skittish one.

The JSE is down 7% year to date and the US market is down around 4,5%. This is no cause for concern yet – merely a healthy correction. Actually, situations like these where all the shares in the index are down, create fantastic opportunities to invest in quality companies dragged down by sentiment rather than fundamentals. Of course there will be shares that do not rise to the surface again after the storm is over but there will be lots of shares whose fundamental buoyancy will make them pop back up.

In our newsletter of 22 January this year we wrote that the markets were expensive and that we could see a 10% correction any time. We also mentioned that it was prudent to re-balance portfolios to ensure that you had a chair to sit on when the music stopped. The danger for investors lies not in the broader market sell-off, but rather that the individual share we might own should go down alone. This solo diver might be based on actual rotten fundamentals and a permanent loss of capital might stare us in the face.

We therefore appreciate the work our fund managers do to minimize those rotten apples and on top of that we always prefer to diversify our portfolios among different and uncorrelated asset classes. So, even if the market drops a bit more, we should see this for what it is: a short-term correction in a longer-term growth plan.


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