By: Shaun le Roux from PSG Asset Management
Investors are repeatedly told to buy low and sell high when investing. In the abstract, this famous adage makes perfect sense. However, it can be monumentally difficult to execute successfully.
“The market is actually configured to make you do the exact opposite; to make you buy high and sell low,” said Shaun le Roux, fund manager at PSG Asset Management. He was speaking at the firm’s recent Spring Update roadshow in Cape Town.
For example, when shares are cheap it’s normally because there is a strong sense of fear in the market. This is inevitably caused by a negative narrative around certain events or the current economic environment, and how shares will be affected.
Consider the collapse in commodity prices in the second half of 2015. Markets were in a tailspin and buying commodity stocks during this time made investors extremely uncomfortable. Glencore, one of the largest natural resources producers and traders in the world, was on every investor’s ‘sell’ list. Analysts were saying that it was on the brink of going out of business and would require re-capitalisation. Asset managers that held the stock came under heavy criticism. Buying low under these circumstances would have been very difficult indeed. But investors who were able to look through the negative narrative and recognise Glencore’s strong fundamentals were handsomely rewarded when its price recovered in the months that followed.
Similarly, when the narrative is very positive – when there is good news surrounding a stock, sector or a particular economy – it’s always difficult to sell. In 2007 and the first half of 2008, investors were reading about the rate at which China was urbanising and the incredible impact this would have on commodity markets. While there was some truth to this narrative, commodity prices and related stock prices were hugely mispriced at the time. But amid the good news, investors were reluctant to sell them.
“Ironically, investors will perceive the risk of investing to be lower when the story is strong (and prices more likely to fall) and perceive the risk to be high when the story is poor (and prices more likely to rise),” said le Roux.
He noted that currently another strong narrative has developed around the global technology super giants. These are businesses with excellent fundamentals that are dominating sectors of the technology industry. It makes it very tempting for investors to buy them, and very difficult to sell current holdings. But investors also need to consider the price at which they’re investing – do the share prices fairly reflect these companies’ fundamentals?
If you are disciplined about buying low and selling high, it will mean sitting in cash (from overvalued holdings you’ve sold) while you wait for opportunities to invest in undervalued, high-quality securities. This can also be uncomfortable, as cash generally delivers inferior real returns relative to riskier asset classes. However, le Roux said that this is a one-dimensional view on the asset class. “The true value of cash only reveals itself when the market panics, and investors need it to buy a strong position in an outstanding company at an excellent price,” he concluded.