Would you like to know how professional fund managers invest in this volatile market environment?
We are of course talking about investing for the medium to long term. If you are looking for tips to actively trade the market, then this article is not quite for you.
The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
Instead of providing a list of rules or policies to follow, we thought it might be more useful to provide some actual investment situations we’ve encountered over the recent months. A real behind the scenes look at some of our thought processes.
In part 1 of this series of articles, we start with the “I Really Can’t Sell That” conundrum.
“I Really Can’t Sell That”
If only we had a dollar for everyone who has said this to us in the past couple of months!
Nearly everyone we have been speaking to who own Australian shares have been lamenting the negative performance of their portfolio. On many occasions, our simple question to them is why do you still own so much resources shares?
The answer we get is normally some variation of “it has gone down 60%, I really can’t sell that” or “there is no way iron ore prices will get any lower”. We call this the “I really can’t sell that” conundrum. At AtlasTrend, we don’t agree with this thinking.
For us, investing is always about looking for the best risk adjusted return for the funds that we have been entrusted with investing. This means we look at our investment universe on a very regular basis. It forces us to always ask whether there are better investments available versus what we already own. If the answer is yes, we will sell that existing investment, regardless of what we initially paid for it because we can redeploy the funds for better returns elsewhere.
The above sounds logical. However, in practice it can be a very difficult discipline to put in place. Why?
It is all due to fear.
The Fear of Missing Out
From an investing perspective, there is not much worse than selling an investment for a large realised loss and then watching that investment increase in price again when you no longer own it. Without exception, everyone hates this feeling of missing out on the potential share price rebound.
However, has this fear ever caused you further losses rather than actual profits?
To battle against this fear, we take a disciplined approach of assessing risk and return. Investing in listed stocks within the resources sector is a topical example. If we were invested in a listed iron ore producer, we would be selling our position. Iron ore prices are floundering, dividends need to be cut, balance sheets are somewhat at risk and there are little to no future growth prospects to speak of for the foreseeable future.
The only reason to hold iron ore stocks would be a view that iron ore prices will experience a sustained increase. At best, forecasting iron ore prices is currently a stab in the dark. Most so called experts have gotten it terribly wrong in the past few years. For many investors, there are much better risk adjusted investments available in companies and industries that currently have the opposite industry dynamics compared to the resources industry.
Yes, you may realise a loss selling your resources investments. Yes, they may have a short term share price bounce. However, the reality is much of the resources megatrend of the past decade is over. It is time to move on and not let the fear of missing out on a rebound hold you back. After all, successful investing is about finding good companies in industries enjoying a strong tailwind.
We leave you with a simple question to help avoid the “I Really Can’t Sell That” conundrum. For every listed share you actually own right now, ask yourself:
“If I didn’t own this share at all, how many of these shares would I buy right now? – If you answered I wouldn’t buy any then you probably shouldn’t own any.
AtlasTrend has just launched a 4 part series on the listed stocks you should get exposure to in 2016. Register to become a member here (it takes less than 1 minute) to start receiving the AtlasTrend series of Trending Insights exclusive to our members.
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