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A personal achievement

The market is unpredictable in the short term, but in the long term it always reflects the ability of companies to create profits

11 . 09 . 2019
GIORGIO Angiolini (Azimut AM)

3 minutes

For many years as an investor and as a consultant I have known the malaise that takes you when the market falls and with it drops your portfolio, or worse, when your investments go down while the market in general is going up.

We all want to make money when others earn, but we don’t want to lose when everyone loses. Basically, we would like to be able to predict the price trend to be invested when the markets rise but be out of the markets when they start to fall.

The impossibility of systematically predicting the future is a difficult reality to accept and for this reason investors allow themselves to be attracted by what has been successful in the recent past, attributing this success to an alleged ability to interpret and anticipate market movements. Except then abandoning the strategy when it doesn’t work and looking for another that looks like to have behaved better and then another and then another still, and so on.

Unfortunately, these constant changes lead to only one result: most investors are dissatisfied with their investments and the huge amount of money parked in bank accounts and monetary instruments continues to increase, as a sign of renunciation.

Yet history speaks for itself. In the long term, monetary instruments have greatly reduced the purchasing power of savers, while equities have multiplied the one of investors.

What prevents us from benefiting from the long-term gains that come from equity investing are our emotions, the fear of volatility that we have become accustomed to mistakenly call risk. In this we have been helped by regulations which, perhaps in order to pander to human nature, impose consultants to assign their clients, after careful interview, a risk profile to which a range of volatility is associated.

When portfolio volatility exceeds the upper end of the range, the advisor should advise selling some of the “riskier” components in favor of others “less risky”. Conversely, when portfolio volatility falls below the lower end of the range, the adviser may suggest buying components that were once more “risky.”

Essentially, the behavior that comes from complying with regulations seems to be to buy high and sell low.

We all admire Warren Buffet, universally regarded as the greatest investor of all times, for achieving extraordinary long-term results. Those who bought shares in his Berkshire Hathaway in 1987 and kept the stock to this day would have multiplied his investment more than 100 times, with an annualized return of more than 16% – more than double the performance of the world’s largest stock indices over the same period.

But that 16% is an average, of course. Not every year would have been the same. For example, from June 30, 1998 to February 29, 2000, Berkshire lost 44% of its market value while the average global stock exchange gained 32%.

Few investors have resisted and, rather, they have abandoned the strategy, selling the stock to follow the prevalent fashion, the flock. In doing so they missed the strong bounce that followed.

During that period of great “underperformance” Berkshire continued to publish its real profits, which grew much more than those of the “dot-com”– Internet-related companies– whose prices were rising relentlessly fueling the rise of the indices, until the bubble burst .At that point, as global markets plummeted, Berkshire embarked on a spectacular ascent, leaving those who had sold it in a situation of helpless frustration – having lost first on its descent and then losing again along with the rest of the market.

But an “Authority even higher than Buffet” serves as a second example.

Wesley Gray, in his book “Even God Would Get Fired as An Active Investor,” calculates the results that would have earned an investor who knew in advance which shares would rise the most over the next 5 years.

Starting in 1927, the author built a portfolio that at the beginning of each five-years period invested in equities who then had the best performance at the end of the period. The result would have been excellent: 29% per year for about 100 years.

With that performance, the investor would have accumulated enough capital to own virtually the entire market. But now comes the amazing thing: at some point, that impossibly good portfolio would have been at – 75% compared to the previous high!  Remember, the portfolio only invests in the best stocks, but at some point even the best stocks fall sharply, as in 2008. The author’s conclusions are clear – not even God could meet many investors’ requirements. Therefore, it is not surprising that most people don’t make much money on the stock market.

In the light of this, it is clear that we need to approach investment differently from what our human nature would like – comfortable and unstressful – and that we are being offered to pander to our emotions

We must have a strategy that allows us to always be consistent and to know what to do, in every market situation.

In short, we must pursue a personal achievement: To overcome our emotions and to act in a rational way.

Fortunately, in this we have a great ally: Francisco García Paramés who in his book “Investing for the Long Term” has totally opened up, passing on his experience, explaining his process and comprehensively treating this universe of investments, to the point where we became familiar. His reading, even repeated, leads us to an important conclusion:

Volatility – inevitable and almost always unpredictable – is the great friend to us investors, because it allows us to seize opportunities that without it would not exist. Instead of trying to predict it, we must be prepared to manage it to create the conditions that allow us to fully enjoy the fruits of the subsequent ascent. We never forget that the market is unpredictable in the short term, but in the long term it always reflects the ability of companies to create profits.

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