6 lessons from years of market cycles

Achieving enduring, sustainable outperformance over long durations of time is the ‘north star’ objective of every investor.

My observation is that sustaining outperformance is most commonly the consequence of a rigorous, repeatable process, a contrarian mindset and disciplined risk management.

Below are several observations that I believe are useful for investors thinking about how to approach markets over the long term:

1. Australia: the best place to invest globally for the long-run

It is easy to get caught up in local pessimism and politics however, from a global capital perspective, Australia is a beacon of stability. We view Australia not just as our home ground, but as a premier investment destination for global capital.

The fundamentals are undeniable. 

We possess a rare combination of high population growth off a relatively low base, a highly educated population and consistent economic expansion. In a geopolitical environment increasingly defined by sovereign risk, the safety of the Australian legal framework is a premium asset. 

When combined with our immense endowment of natural resources, Australia has structural tailwinds that few other markets can match.

2. Scarcity of true alpha: Truly exceptional investment opportunities are rare

In any given year, the market consistently throws up significantly mispriced assets. The true skill is understanding when the odds are skewed in an investors favour, and when valuations provide an asymmetric risk vs reward opportunity.

Good opportunities are rare and we believe that risk comes from not understanding what you own.

We believe that it is far safer to hold a smaller number of positions that an investor knows intimately rather than holding a large number of positions where knowledge is thinner.

Concentration within a portfolio forces discipline; it demands that every selected position fights for its place.

3. The value of flexibility: Buying the unloved

I often find that the best value is found in the unloved corners of the market in sectors that are currently out of favour, misunderstood, or facing temporary headwinds. Being sector agnostic is an important part of an investors toolkit and expands the investable opportunity set.

Too often we see whilst the herd chases the latest thematic rally, certain sectors are forgotten leading to significant valuation differentials and capturable alpha.

4. Opportunity exists in all seasons

There is a pervasive myth that you can only make money in a bull market. This is false. There is always opportunity in markets, even in downturns.

Market volatility is the friend of the absolute return investor. When the market sells off indiscriminately, very often high-quality businesses get marked down alongside the dross.

We view downturns not as a time to panic, but as a liquidity event that presents bargains. 

The key is looking at the idiosyncratic underlying drivers of a company, rather than just the general market sentiment.

5. Cash as an active weapon

Implicit in a concentrated approach is the discipline to hold cash when opportunities are scarce.

Investors shouldn't feel the pressure to be fully invested if the risk-reward payoff isn't there. Cash is not a drag on performance; it is an option on future volatility. 

Being a liquidity provider when others are forced sellers, often leads to great buying opportunities where fundamentally strong companies can be purchased at a discount to their intrinsic medium-term values.

6. Passive investing and the small cap opportunity

The rise of passive investing has skewed the pricing mechanism at the top end of the market. The proliferation of ETFs means that billions of dollars flow indiscriminately into the largest companies, creating a "crowding effect" that divorces price from value.

While large caps are bid up by passive flows, Australian small caps are frequently left orphaned. This is where we are finding the alpha lies presently. The small-cap sector is less efficient, under-researched, and largely ignored by the passive giants. 

For an active investor willing to do the work, this is a hunting ground rich with mispriced businesses that have real growth runways. 

Managed Fund

Datt Capital Small Companies Fund

Australian Shares

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Managed Fund

Datt Capital Absolute Return Fund

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