The danger of “swing and miss”

We are entering that period in financial markets when your butcher, hairdresser and gardener are all giving you investment tips because everything is going up. Our own JSE All Share jumped 13% in just one-and-a-half months, which is already a decent return for a whole year.

In the USA things are even getting a bit silly, with some companies going up a 1000% in a week and then falling 95% the following week to leave the investors with nothing more than an elevated heartbeat. Many of us know people who have created a lifetime’s worth of wealth over the last few months because they were invested in Bitcoin and Tesla. We are living in very surreal times, where fundamentals have been replaced by expectations when it comes to valuing assets – and that is very dangerous.

The frustrating part is that, unlike the panic we saw in March 2020, when everything got 30% cheaper overnight and presented a low-risk buying opportunity if you believed that humanity would survive; this new all-time-high environment is ambiguous in the sense that some companies are still cheap and can run much higher, but others are in a bubble and could deflate at any time. It seems, however, that if you tread lightly when buying assets where you cannot apply fundamental valuations – like Bitcoin; or where the valuations are very stretched based on their financial statements – like Tesla; you should still invest in companies where the fundamentals are sound and where you have a longer time horizon. The reason we say that, is the fact that your personal judgement in based on what you read and hear in the media; when it should be based on doing deep fundamental research on a company, coupled with an objective expectation as to how relevant that company will be ten years from now.

There is an investment adage that says, “the trend is your friend”. What this means is that when there is a momentum towards any particular side, up or down, you should not try to time the end of that momentum. We have seen many investors who thought the market was too expensive, or too cheap, and sold or bought too early, only realizing later that they had been wrong and then they just could not get back in or out of that trade. What we advise our clients to do is not to invest short-term money in the equity markets to start with, and then, as the markets become more expensive, to take some profits over time on existing equity investments, but not to take a big swing based on their expectations!

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