Investing 101: Capitalising on fear

James Marlay

Some big names global investors have issued stern warnings about impending bouts of volatility in markets. It makes for great reading, but how useful are these warnings are for most investors? I sat down with two wealth managers and discussed the strategies they use to capitalise on periods of volatility.

Marks and Dalio go full bear!

In the space of just one month we’ve had two influential investment managers sound the alarm on markets. Howard Marks of Oaktree Capital highlighted no less than nine sources of concern, while Ray Dalio from Bridgewater Associates made a case for increasing an allocation to gold as a hedge against rising risks.

The memos contain some fascinating views. Neither are alarmist and both offer their own take on the appropriate course of action. The problem is that Marks and Dalio are making calls that rely largely on their timing being spot on or at least close to. As we know, timing markets and making predictions is fraught with danger. But that doesn’t mean you shouldn’t allocate some time to ensure you’re in the right mind set when markets inevitably take a hit.

So what are the risks?

With this backdrop I put the question of current risks to Alex Leyland from Leyland Private Asset Management. He had this response; “Look everything that’s known about in the market is priced in… We all know about housing prices in Sydney, we know about geopolitical issues, we know about Brexit and Trump. There’s been a range of things that have occurred and now the markets just numb to it all.”

Don’t try and control the uncontrollable

I reckon he is spot on with his assessment. At the end of the day there will always be a long list of things to worry about – chances are nothing you know about is going to be the cause of the next market ruction. The biggest risk in my view is that you get stuck worrying about the next Black Swan and it stops you from executing on a sensible investment strategy.

On risks Clark points out that the ‘experts’ were wrong footed on the market reaction to events such as Brexit and Trump’s election. He says even if you can call some of these left field events history has shown that predicting how the market will react is very difficult.

Highlighting the impact of rising bond yields on equities in late 2016, Clark says; “that’s definitely something you’ve got to keep an eye on. History has taught us it probably will have an impact at some stage in the future. I think you’ve got to have a bit of a view on what you think bond markets are going to do.”

Volatility can enhance returns

Ben Clark from TMS Capital says volatility can enhance your portfolio returns and argues that it can set you up for much greater long-term returns than you’d normally get. Firstly, he says that investors need to have confidence in their knowledge of the companies they own - so they don’t panic. Secondly, he likes to have a portion of his portfolio in cash that can be deployed into the market during periods of volatility. “Sometimes it can feel like you’re sitting on that cash for a long time and it’s not earning much of a return.”

As sure as night follows day volatility at some stage will provide good opportunities.

Leyland takes a different approach. He prefers to be fully allocated to equities and uses the cash from dividends to reinvest into the market. Where their strategies align is on the need to focus on owning quality companies. “As long as you are in good businesses that don’t go backwards. So balance sheet strength, for instance, is very important. So if the companies you own survive, you tend to do quite well.”

Key points

Volatility is a part of equities investing. You’re not going to be able to predict when it will arise and what will cause it. It’s worth being aware of the bigger picture but it shouldn’t paralyse you from executing on your strategy. These were some of the points I took from my discussion with Alex and Ben.

  1. Know your businesses backwards.
  2. Try and disconnect yourself from the emotional side of investing.
  3. Have your own view on valuations for the companies you own and be ready to deploy cash when volatility hits.
  4. Surround yourself with people that have a sensible view on the market.
  5. Try to look through any sensational bad news headlines.


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