Investment Thoughts

Cynics often identify a market bottom by the sudden exit of unsophisticated investors and regard strong equity inflows as an indication that a peak has been reached. The bottom end of that scenario may have recently played out.

Paul Hansen, STANLIB retail investing director, says, “Our advice in recent weeks was to sit tight and exploit value opportunities as some share prices were looking extremely attractive. Sadly since late June and early July we have witnessed steady net outflows from funds across the board.”

“It is beginning to look as though this occurred close to the bottom in some sectors. In other words, ordinary investors took losses of perhaps 30% or more when a market upturn was not too far away.”

Hansen says it is understandable that confidence fell to a low ebb during recent market weakness, but “buying high and selling low does not build wealth.”

Between October and the end of June, the banking index fell by 40%, down from 36 000 points to 25 700. Between November and early July, listed property was down 38%. The value of some industrial shares fell by up to 40% over a similar period. Hansen acknowledged that it was to early to call a bottom, especially as banking shares had flattered to deceive as recently as February.

“However, after a dramatic slide between February and mid-year we saw a gain of 22% by our banks in the four weeks to the end of July. We then saw signs of some profit taking but the underlying feeling was that financial shares had seen the worst.

“The annoying thing from the perspective of the small South African investor is the suspicion that foreign investors spotted the value opportunity in late June, bought in, benefitted from a 5% strengthening of the rand in July and took a 25% profit at month end.” Foreigners would also have been quick to spot that the balance sheets of South African banks were under no discernible threat from the northern hemisphere’s sub prime debacle.

“We had a situation where international banking sector contagion spread to a local market and depressed sentiment when local factors were quite robust. Negative sentiment was overdone. Intrinsic value was not in doubt. Unfortunately the average investor is sensitive to prevailing sentiment and is usually less perceptive on techni cal matters. That’s why there is always a danger that the ordinary investor will join a stampede for the exits at the wrong time.”

Once you sell at a loss you never have the opportunity to recover it.

How to guard against this behaviour? You don’t need to transform yourself into a market expert – “just tell yourself you can’t time the market. What you can do is diversify your holdings so you are not over exposed to equities or any one asset class. You can then ride out short term volatility. Sitting tight may seem passive, but it makes more sense than a mistimed exit.”

The market is currently very volatile and unstable. Should I wait for some stability before I enter the market? No says Hansen, because then it is too late. “It might not be a perfect time to buy but it is a good time to start accumulating.”

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