What we're reading — Roger Montgomery writes about buying and selling at the wrong times
05 October, 2015
Respected Australian fund manager and author, Roger Montgomery, recently wrote a piece about investors who withdrew funds a month after investing in his newly launched global fund, having been unnerved by global market volatility.
When surveyed, investors in Roger's international fund who withdrew their investments cited fears about an economic slowdown in China and its potential impact on markets globally.
This jumping-at-shadows behaviour leads to poor outcomes.
According to the latest 2014 release of Dalbar's Quantitative Analysis of Investor Behavior (QAIB), which has now been running for 21 years, the problem is not the returns of the funds. In many cases, the funds have outperformed their market benchmarks. The problem is that investors are producing lower returns than the funds they invest in.
According to the report, the average mutual fund investor has simply not accomplished either the goal of maximising capital appreciation or the goal of minimising capital loss.
Investors who try to time the market invariably buy at the highs and sell at the lows. Of course this is a function of the minute-by-minute quotation of share prices. The same behavior would be seen in property if house prices could be seen changing every second. In that scenario property owners would spot trends and draw charts and then start trading property; "come on Darling, four bedders are going down, we need to sell now and buy one-bedders."
Silly behaviour emerges when instead of focusing on a business, investors focus on economics, or the market's gyrations.
Roger wrote the following in his 2010 book, Value.able:
"Consider the US IPO of Coca-Cola in 1919 at $40 per share. A year later the stock was trading at $19.50 — the result of rising sugar prices and a perpetual contract Coca-Cola had with its bottlers to supply syrup for $1 per gallon. What would have happened if your grandparents or great-grandparents purchased a single share in 1919 at $40 and held on through the subsequent decline to $19.50 in 1920, then on through the great crash of 1929, the subsequent depression of the 1930s, World War II, a baby boom, dozens of other wars and skirmishes, an oil crisis, assassinations, the fall of the Berlin Wall, yuppies, innumerable recessions, booms, busts and scandals, as well as a war in Vietnam, two in Iraq and a global financial crisis? If they kept this share in the family and reinvested all their dividends, they would on 8 January 2010 have 126,321 shares and their investment would have a market value of $6,966,603.15."
The company has continued to pay dividends in the five years since, and by March of 2015, after 14 further dividends and the two-for-one split, the value of that single Coca-Cola share in 1919 had grown to $11.7 million.
|Fisher Funds view: We are certainly aware that market volatility can be unsettling for some investors. It can often lead to investors making the wrong decisions at precisely the wrong time. We encourage investors to focus on their own investment goals and strategy when making investment decisions, rather than be influenced by market movements. Daily market movements reflect the collective views of multiple investors, whose circumstances and investment objectives may differ entirely from yours.|