Why waiting for certainty costs investors dearly
Are you waiting for clarity before putting more money into the market? Keen to see what happens with inflation and interest rates before investing more in volatile equities? You aren’t on your own. It’s the most common feedback we hear from investors at the moment. Everyone wants to wait and see.
You are likely to be disappointed.
“The tide doesn’t turn when there’s light at the end of the tunnel. The tide turns when it’s pitch black, just a shade less pitch black than the day before”.
That quote is branded on my brain. It was March 2009 and, by coincidence, famous value investor Jeremy Grantham had picked the absolute bottom of the market to make his point in a letter to his investors. For those who don’t remember, the world economy was staring down the prospect of another great depression.
Six months later the S&P 500 Index of US-listed stocks was up 51%. Australia’s All Ordinaries Index had risen 48%. We were well into 2010 before the risk of economic meltdown had abated. Yet all of the gains came before the coast was clear.
Financial markets are barometers of sentiment. Trying to pick the top or bottom of the markets is nigh on impossible. If you do want to nail it, though, history has shown that waiting for less uncertainty is not going to help. You need to pick the point of maximum pessimism, the point where uncertainty is at its peak.
This applies to overall markets and it applies to individual stocks. Many stocks in both of Forager’s funds are already trading well above their recent lows. Shares in global sportsbetting company Flutter have risen 37% since their recent low just 7 weeks ago. Healthcare logistics company Cryport has seen its share price rise 60% since May. On the ASX, two holdings in the Forager Australian Shares Fund have been subject to takeovers in August.
To be clear, we have no idea whether the worst is behind us or not. Our approach is to value businesses based on their long-term cashflows and buy shares in those companies when other investors are too pessimistic. The more perceived uncertainty around, the more of those opportunities we typically find.
Whether this is a false dawn or the real one, you don’t get to wait until the sun comes up and still get to buy cheap stocks. We believe it is uncertainty that creates the opportunity and, the second the uncertainty disappears, the opportunities disappear with it.
Don’t let uncertainty be the thing that holds you back from great long-term investments.
Steve Johnson
Chief Investment Officer