Make investment wins by avoiding the two most common investing mistakes
Most investors typically make two mistakes when managing theirs or others' wealth. The first is that they fail to sell things when valuations are stretched far beyond where they should be, whether this relates to property, equities, FX rates or commodities. They then tend to make a second mistake; having failed to sell when they should have, they either sell assets at the wrong time (when forced to do so, or when worried about further falls in asset prices), and/or fail to buy assets when they are truly cheap.
An incorrect first decision tends to foster a wrong second decision and as a result few investors truly capture the opportunities that are presented to them at the peak of the cycle, and then at the base of the cycle.
Both types of mistakes tend to occur because most investors fail to understand, or make an effort to understand, that economies, and financial markets, tend to cycle, between growth (which tends to be long lived and often lasts for 6-8 years) and contraction (which tends to be reasonably short, often only 4-6 quarters in length). Failing to work out where for example stock markets are in their cycle at a particular point of time means that investors often don’t then know when or whether to buy or sell stocks.
Without the rational and simple understanding of a “tool”, such as the knowledge of stock cycles, investors then tend to do irrational things. At market peaks, when everyone they know is making money invested in this or that stock, the investor feels pressured by peer performance to buy stocks hoping for a quick 25% gain, like their friends have. On the other hand, when stocks are on their lows, and the investor fails to understand the cycle, he or she often delays purchasing stocks when they are deeply discounted, because negative sentiment is pervasive, and due to the fear that stocks could easily fall another 25% or so yet.
At Antipodean Capital we try and develop tools and frameworks that allow investors to understand the assets they are considering investing in. Our research is conducted into the US, AU and NZ business cycles, to name a few, so that we understand exactly where we are in the growth and equity cycles in those countries, thus we are better positioned to make more informed decisions than others.
With solid frameworks, the goal is to avoid making the two investment mistakes outlined above. Perhaps the simplest and most useful chart that we and our clients can follow is that of the economic cycle. Understand the economic cycle, and you will understand when to sell, and when to buy, and avoid making those 2 common investing mistakes too.
The chart above, outlines the sort of economic and market circumstances that occur at varying periods in the economic cycle. This cycle applies to all economies globally, whether in the USA, AU or NZ economies, or those in Asia or Europe. The recovery, early upswing and late upswing phases are the three hallmarks of expansion cycles, in terms of economic growth and stock markets. The slowing and recession phases are the hallmarks of corrective periods where growth and stock markets slump. Typically the first expansion phase lasts 6-8 years, and the corrective phase 12-24 months. Thus prepared with the criteria that characterise each phase, the investor can ascertain where they are in each point in time, and make investment decisions accordingly.
Currently in September 2017, we believe the global economy is in late upswing phase. Global GDP growth is rebounding, inflation is picking up off its recent lows, and monetary policy globally is at various restrictive phases depending on the country you look at. Cash rates and short bond yields are rising, stock markets are booming but overvalued, as the US market cap to GDP at 132%,the second highest on record, indicates, and property prices have been rising strongly. Commodity prices have been rising off their lows of 18 months ago, although they are four years off boom levels. Our strong sense therefore is that the late upswing phase is where we are now as 2017 ends.
The tricky bit is working out how long this late upswing cycle will last, and when it will roll over into the slowing phase. Our sense remains that we are not quite at the tipping point into a slowing economy, but rather that the upswing phase still has 6-12 months left in it yet. This could take the upswing phase into mid 2018.
Forewarned is forearmed though. With knowledge that the growth and equity cycle expansion phase is near end, investors can prepare portfolio’s and avoid making that first of all mistakes, not selling when asset prices are overvalued. Doing so will allow investors to buy assets cheaply at the new corrective cycle low-point, which should occur 12-24 months after this late upswing cycle ends and tips over.
Craig Ferguson - Director Strategy