THE BIGGER PICTURE
The term "safe haven" has always been part of the investor's vocabulary, taking on special significance in times of increased uncertainty. The attributes of a safe haven asset lie more with the investor than with any opportunity in the market.
It has everything to do with who you are. How well do you know yourself? How do you react to risk and how do you perceive and react to opportunity? When market prices fall suddenly, commentators and money managers often refer to 'volatility'. A sharp decline can lead to negative or even fearful reactions, but a more accurate definition of volatility is a 'statistical measure of the dispersion of returns for a given security or market index'. We can embrace volatility and use it to our advantage as investors, or we can be used by it.
As I manage money for clients and my family, I retain sufficient liquidity to meet unforeseen circumstances without having to redeem shares from an investment strategy. Thus I am able to embrace market volatility.
If the price of a security or index falls by 50% a few weeks after you bought it, you should be delighted to buy more shares at half the price. In addition, you should not own even one share in a business unless you are prepared to buy the entire business. Having already expended the intellectual capital that caused you to buy, why would you not wish to own more, if you have the means? An investor who does not have conviction of ownership will not be capable of using volatility to their advantage or of creating a safe haven.
If you are able to handle the emotional challenges that volatility brings, then you can find a safe haven in buying a reasonably priced, well-managed business run by honourable people who deliver a duty of fiduciary care to shareholders. But for others who do not have this emotional fortitude, it is anything but safe.
Ownership of gold bullion, a proven store of value and the only asset that is not someone else's liability, is another safe haven. Developed government treasury bonds have historically proved to be a safe haven. However, excessive government indebtedness may reduce the safety of this security in the very long term.
In the very near term, cash is a safe haven asset, especially the US dollar, which is the world's reserve currency. To take advantage of buying mispriced assets, the inevitable fall in purchasing power due to the negative real interest should be offset by the optionality provided by cash.
According to Benjamin Graham, "In the short-run, the market is a voting machine [reflecting price]. Yet, in the long-run, it is a weighing machine [reflecting value]." In today's market, we must either be contrarians or we will become victims. Safe havens are created by the investor, not by the market.
The author is a member of the Society of Trustees and Estate Practitioners and an investment counsellor. The comments and observations by the author are a reflection of his opinion and do not constitute an offer to buy and hold securities, nor does he receive any remuneration of any kind from names referred to.