You may be hard-pressed to find many happy memories of 2020, but as far as investing goes, there’s much to be gleaned from last year’s white-knuckle markets ride.
Most of all, says value investment house Allan Gray, the year was instructive in "how we react and handle ourselves and our investments in times of crisis".
This is a round-up of key investment insights from its top portfolio managers.
Skate to where the puck is going
Duncan Artus
Bull markets are normally born of pessimism and do not want to take investors along at the start. It is difficult to envisage a more pessimistic scenario than that of 2020. As the market was collapsing in March, not many would have foreseen that, a year later, it would be making new highs.
Successful investors must skate to where the puck is going, not to where it has been. In this case it was to appreciate correctly that the extraordinary monetary and fiscal response would remove a significant part of the extreme downside risk in asset prices. Missing the puck because you ideologically oppose these measures was a mistake.
I like to step back and ask myself: if books about 2020 are written in five years’ time, what will they say about investors’ behaviour with the cold eye of history? I think they will say that many assets were selling at great prices.
While there will be long-term consequences (perhaps much higher global inflation) of the actions authorities have taken, I believe we still own several cheap local shares.
Sometimes the best thing to do is nothing
Londa Nxumalo
SA bonds had a tumultuous time in 2020: starting with pre-budget jitters, escalating into a complete meltdown due to Covid and the Moody’s downgrade, getting rescued by the Reserve Bank and finally screeching into green territory at the end of the year as Joe Biden’s presidential victory in the US and vaccine approvals brought some optimism back into the markets. This enormous amount of volatility presented opportunities for those who could hold their nerve.
What I did right was buying bonds throughout the first half of the year at extremely cheap levels. With the benefit of hindsight, I exited too early: it would have paid off to be a little less risk averse. Given the excellent entry levels, I would have benefited from bonds continuing that strong run right up until February this year. Sometimes, the best thing to do is nothing.
Distinguish between the facts and the noise
Kamal Govan
Market conditions like those in 2020 really test your firmest convictions. Substantial returns were on offer for those who could distinguish between the facts and the noise — and who were right with their high-conviction beliefs. My first takeaway from 2020 was that this is easier said than done. The overabundance of information plays havoc with our emotions and our behaviour. The second lesson for me was that having liquidity to capitalise on high-conviction opportunities is crucial.
Even in times of crisis, focus on your long-term view
Rami Hajjar
The commitment to a disciplined, long-term investment strategy is key — even more so during times of crisis, when irrationality dominates.
Our approach to the Nigerian stocks we own is a case in point. As Covid struck and the oil price collapsed, the share prices of our main holdings in Nigeria, particularly the banks, halved in naira terms. The correlation between Nigeria’s stock returns and the oil price is very high: besides being a large direct contributor to economic activity, oil represents nearly two-thirds of government revenue and almost 90% of Nigeria’s foreign exchange income. Close to 50% of banks’ loan books are exposed to oil (directly or through funding the supply chain). Furthermore, a high oil price increases the supply of foreign exchange, supporting the sustainability of other non-oil sectors that rely on imports to operate, and prevents the currency from blowing out.
As the oil price collapsed to a multiyear low, many investors dismissed the Nigeria investment case, causing the share prices of Nigerian stocks, and banks in particular, to collapse. For us, this presented opportunity. A year on, this thesis has played out: the weighted average return on our Nigerian bank holdings is up 77% in dollar terms since the March 2020 lows.
The lesson may seem banal, but it holds true: even in the worst of times, stick to your long-term view.
Look for quality assets at bargain prices
Sean Munsie
Even if, in the early days of the pandemic, you had correctly called the economic fallout, ultimately you would have been on the wrong side of the trade — so much so that in some areas asset prices now seem increasingly detached from the reality on the ground.
The recovery has been uneven, though, with the financial impact set to be longer lasting for some businesses, industries and countries than on others. A crucial decision that had to be made last year as markets fell was whether an asset was just caught up in the selling pressure or whether it was cheap for a reason. Investors may have only a few opportunities in their careers to buy quality assets at bargain prices. This is when the value of a thorough investment process, when married with conviction, can become evident.
Maintain a targeted asset allocation
Tim Acker
Liquidity gives you options in times of crisis. In early 2020, as all asset prices fell, cash was very valuable as it could be invested in the market. It was, however, hard to know how much further markets could fall, and it was easy to find reasons why they could fall a lot more. This made it hard to know when to "pull the trigger" on moving more cash to equities.
In most cases it’s better, and less stressful, to have a targeted asset allocation rather than trying to time the market. Combining this with periodic rebalancing adds the advantage that you are automatically buying when prices are low and selling when prices are high.
Don’t be afraid to sell too soon
Sandy McGregor
One of the most joyful experiences is to be on the right side of an investment mania or bubble in its early stages. The past 12 months offered great opportunities in this respect. Governments and central banks have abandoned all sense of traditional financial prudence and are spending and printing money as if there is no tomorrow. Almost by accident, modern monetary theory has become the new orthodoxy. Private savings have soared during the pandemic, and in a world of low and even negative interest rates, money is flowing into equities and property. The green and IT revolutions are dramatically disrupting a long-established economic order, and a lot of these investment flows are heading their way. Tesla and bitcoin are the poster children of this new era. Their prices have moved upwards without regard to rational investment metrics. Generally, the tech sector of the market is priced for perfection.
We are in the middle of an investment bubble. Sooner or later bubbles burst, but great fortunes can be made by selling at the top. So your instinct is to hang on for a bit longer. The danger is that bubbles pop when you least expect them to do so. Already we have seen a sudden reversal in US bond markets, which took most investors by surprise. Even the pessimists thought we could wait until the northern summer before selling. The most difficult decision is to sell too soon, but many great fortunes are based on the application of this precept.
Admit when you are wrong
Jacques Plaut
Any good investor must have the ability to change their mind. Allan Gray started buying Naspers shares in 2013 after telling clients for years that we thought the share was overvalued, and after the price had increased from R150 to R600. In this case we had been too dogmatic about not buying a share on a high p:e multiple. We had also underestimated the growth potential of Tencent, and our assessment of Naspers’s management was too pessimistic.
Changing your mind means admitting that you were wrong. This is difficult, but investors should make a habit of admitting mistakes. Of course, there is a balance between changing your mind and sticking to your guns when the price of a share moves against you. Changing your mind based on new evidence is healthy, but changing your mind because the share price has influenced your mood can be fatal.
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