Sow the wind, reap the whirlwind

Concentrating our allocation of capital on a few names or big ideas makes us feel like geniuses when prices are rising - and fools when prices fall sharply and keep on falling

JEREMY BLATCH

As investors wrestle with the uncertainty of economic outcomes from the war in Ukraine, not to mention further geopolitical risk in the Balkans, price swings of 1,400 points in days bring anxiety that can easily lead to panic. At times like this, it is essential to know what you own and be certain that your investment strategy is right for you. Just as we all have a unique set of fingerprints, we are all unique in how we invest.

At times like these, investors have destroyed their capital by speculating on what appears to be a certain bet, driven by the fear of missing out. Concentrating our allocation of capital on a few names or big ideas makes us feel like geniuses when prices are rising - and fools when prices fall sharply and keep on falling.

Nobel laureate Harry Markovitz claimed that diversifying market risk is the only free lunch available to an investor. During times of market stress, this means allocating capital to several uncorrelated assets. Many speculators in Crypto, commodities and technology stocks have sown the wind of greed, gambling with excessive leverage and borrowing money to maximise returns. Now they stand to reap the whirlwind.

No one can predict the future with any degree of consistency, especially economic probabilities from geopolitical events. It is foolish to think we know more than millions of investors who collectively determine the price of securities.

If investing in risk assets, we need to be comfortable owning them for the long term. To quote Warren Buffet, if we are not prepared to own an asset for ten years, we should not own it for ten minutes.

Witnessing daily price declines should not bother us, if we have resigned ourselves to the probability of this happening at some point during our investing time horizon. I don't allocate capital to risk assets I am going to need for the next five years or so. It's long term.

I already know, having studied market history, that capital appreciation is not linear. I will have to endure sharp declining prices, bear markets (extended times of flat or falling prices), recessions (flat or negative growth), credit and interest rate risk and so on.

To stay the course in times of high volatility, it is essential to have a well-thought-out strategy that is right for you. It is easy to hold when prices are soaring, but to buy and hold means having the conviction to hold in sharp declines. Some stocks that were darlings during the pandemic are now down 70 to 80%. After outsized gains, they are now reverting to the mean. Trees do not grow to the sky!

Impulse and emotion are the investor's worst enemies, but having a genuine long-time horizon will allow investors to welcome falling prices as an opportunity to buy more cheaply. Instead of producing anxiety and panic, extreme price volatility may be embraced as an opportunity to own more shares, increasing capital when prices reset higher.

Jeremy Blatch 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.

He can be contacted at jb@ehh.gi