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Investment Strategy
Thursday, October 1, 2009
The bigger picture

The veteran investor Barton Biggs’ once said that “trying to find out what’s going on in the world by reading the daily paper is like trying to tell the time using only the second hand of your watch.”

Comments David Green – Chief Investment Officer, PPS Investments, “Every day we are bombarded with a bewildering array of information ranging from significant movements in global house or stock price indices to trivial changes in the futures prices of pork bellies.  Some dicta will seem to support, and others contradict, any chosen asset class or asset manager allocation.
Then there is the seemingly endless supply of pundits, each with their own interpretation of all this information – much of which is entirely self-evident or unhelpful.
Some of the not-so-useful statements I have heard of late include:
• “The U.S. and global economies are showing signs of stabilising. While the odds favour a sub-par recovery, a large confidence interval should surround all predictions of how the cycle will play out.”
• “Possible hiccups may arise as the economic recovery moves towards a self-sustaining path.”
• “Investors are likely to take fright if the news flow deteriorates.”

“Clearly, one should not place much reliance this sort of short-term prognostication,” he notes.
Before making any knee jerk reactions based on short term information investors should think carefully as such a move can have a serious detrimental effect on the value of their portfolios. This is applicable for investors looking to invest or disinvest from the markets.
Instead, it is far more useful to be guided by the long term history of financial markets.
As Sir Winston Churchill wrote, “The further back you look, the further ahead you can see.”
For example, research from PPS Investments, which has the fullest and longest available record of South African financial market history, shows that investors who choose to bow out of the stock market in a downward cycle, risk losing out on some very healthy returns thereafter.


Time and again, the historical data reflects that no matter how bad things may appear, the stock market will recover. In fact, over the 109 years from 31st December 1899 to 31st December 2008, there have only ever been nine two-year consecutive declines of the local stock exchange. Interestingly, there have been no three-year declines.  Even the Wall Street Crash of 1929, and subsequent Great Depression, engendered only a two-year decline in South Africa, and then only belatedly in 1931 – 1932.
“That’s not to say that three-year declines can never happen,” he says, “but it does suggest that making an emotional decision to move out of equities based on short term information is a risky proposition – and a bet against what has proved to be a consistent pattern of stock market behaviour.”
The chart depicts this long march of South African equity investors’ fortunes. You can see from the red ovals, the nine two-year declines.  What’s very important to notice is the huge gap that opened up between the fortunes of local equity investors, and inflation.  A final observation for now is that the average return in years immediately following those two-year declines was a mouth-watering 31.77%.  The highest of these was 92.46% in 1933, immediately after the 1931-1932 decline.
What the equity markets have occasionally taken away, they have always given back in spades, to patient investors. The lesson here is that while it is easy to be swayed by the information we are receiving on a daily basis, it is far more important to consider the bigger picture when it comes to making investment decisions.

Copyright © Insurance Times and Investments® Vol:22.10 1st October, 2009
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