Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 408

Six lessons for investors in a crisis

Market uncertainty is not new. In fact, there have been 12 bear markets in the past 25 years. However, 2020 was a year when investors experienced almost the full range of market behaviour, from the fastest fall in recent history to the sharpest recovery on record.

S&P 500 and S&P/ASX200 Total Returns in 2020



Source: Morningstar Direct

With a bit of certainty now creeping back in, it’s a good time to review what lessons we can take out of the last 12 or so months to navigate future crises.

Here are my top six lessons for investors:

1. Averages don’t count

There’s a joke about averages, where a statistician has his head in the oven and his feet in the freezer and says, “On average, I feel fine.”

For investors, the average may feel fine, but the reality is pretty dire.

During times of extreme market stress, it’s easy to fall victim to behavioural biases such as loss aversion, anchoring or herd mentality. But this type of behaviour is almost always detrimental to long-term superior returns.

It’s one of the hardest parts of investing — especially at the extremes — but I believe investors need to find a way to play devil’s advocate with themselves. This means asking tough questions about why they are making certain investment decisions, and properly analysing both the opportunities and risks that the current market presents.

2. Balance discipline and flexibility

There is a fine line between being disciplined and being dogmatic. One of the keys to successful investing is reacting to changes faster than others in the market and not being static or inflexible. Unfortunately, it often seems that the more discipline people find, the more rigid they become.

It is critical to understand the data points that may appear to be conflicting during the most severe part of a market correction. As an active manager, I believe this is the most important period for adding value for our clients.

3. Cheap doesn’t mean safe

Valuations are always important but investors should not fall into the trap of thinking that 'cheap' means 'safe' during a crisis.

During a financial crisis, the lines between growth, value and other factors blur. What was once growth is now value and what was once cheap may now be heading for bankruptcy. As a quality investor, I certainly appreciate the fundamental argument of not overpaying for a future earnings stream, especially in a crisis. But it’s about quality for me, not cost. I focus on certainty of earnings and strong balance sheets.

4. Use the 'sleeping' test

A good rule of thumb for investors is that if a stock is keeping you awake at night, sell it — or at least sell it down to a level where you can sleep.

One of the best ways to ensure a good night’s sleep during a crisis is to invest in companies with quality and experienced management teams. This experience will stand them in good stead during the crisis, and management teams that know how to compound capital in tough times are more likely to prosper.

5. Start with 'what could go wrong'

The first step in investing is to avoid mistakes. That may sound pretty obvious, but it’s actually more complicated — and harder — than one might think. Before making any investment decisions, investors need to think carefully about what could go wrong with a company and then go from there.

If you don’t own it, you can’t lose money on it. As another favourite saying goes: 'I don’t have to fish in every pond, just the ones that have fish in them.'

6. It’s the things we love that ruin us

Investors often find that buying stocks is easy. It’s selling them when the trouble starts. Investors that focus almost entirely on the purchase price and then base their investment decisions on trying to sell at a higher price, are falling prey to 'anchoring' and are failing to assess a stock on its true merits in the current market, which is constantly changing. Price matters, but it’s not the only thing that matters.

Alignment of interest

I think that 2020 was the ultimate test for many investors. Volatile markets and an uncertain economic outlook in the wake of Covid-19 led to a lot of investor angst. But overarching these top six lessons is one source of truth for all investors: only invest with a manager that eats their own cooking.

A fund manager’s job is to compound each investor’s money, and it is important that the manager and the investor have aligned interests. For more certain investment outcomes, I believe it’s crucial to invest with fund managers who have a majority of their net worth invested into the same investment options that they offer for their clients.

Why? I find this focus automatically changes investment management behaviour. It changes from simply beating a benchmark to producing real returns. It ensures the investment manager is serious about adapting and evolving to different market conditions.

A focus on quality, combined with an adaptive process that avoids being too dogmatic about what has worked in the past, is the key to compounding capital over the long run. In my view, a focus on the forward nature of quality, purchased at suitable prices, is the best defence over time.

No one wants to overpay for assets, so in that sense, we are all value investors. It is just that some of us are more dogmatic about it than others.

Rather than simply asking 'what is the price?', the real question should be 'what am I getting for the price I’m paying?'. On this basis, I believe there are still good opportunities for investors in the current market.

 

Rajiv Jain is Chairman and Chief Investment Officer of GQG Partners. This article contains general information only, does not contain any personal advice and does not consider any prospective investor’s objectives, financial situation or needs.

 

RELATED ARTICLES

13 of the best: reflections from an investor

10 years after GFC, 7 lessons for investors

banner

Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates

Superannuation

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Survey: share your retirement experiences

All Baby Boomers are now over 55 and many are either in retirement or thinking about a transition from work. But what is retirement like? Is it the golden years or a drag? Do you have tips for making the most of it?

Interviews

Time for value as ‘promise generators’ fail to deliver

A $28 billion global manager still sees far more potential in value than growth stocks, believes energy stocks are undervalued including an Australian company, and describes the need for resilience in investing.

Superannuation

Paul Keating's long-term plans for super and imputation

Paul Keating not only designed compulsory superannuation but in the 30 years since its introduction, he has maintained the rage. Here are highlights of three articles on SG's origins and two more recent interviews.

Fixed interest

On interest rates and credit, do you feel the need for speed?

Central bank support for credit and equity markets is reversing, which has led to wider spreads and higher rates. But what does that mean and is it time to jump at higher rates or do they have some way to go?

Investment strategies

Death notices for the 60/40 portfolio are premature

Pundits have once again declared the death of the 60% stock/40% bond portfolio amid sharp declines in both stock and bond prices. Based on history, balanced portfolios are apt to prove the naysayers wrong, again.

Exchange traded products

ETFs and the eight biggest worries in index investing

Both passive investing and ETFs have withstood criticism as their popularity has grown. They have been blamed for causing bubbles, distorting the market, and concentrating share ownership. Are any of these criticisms valid?

Sponsors

Alliances

© 2022 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.