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Take advantage of short term weaknesses

Alan SteelWell, we made it to October after all. Who’d have thunk it, given the pessimistic predictions as September loomed, not to mention the “Brexit panic” in the Summer, the “Go Away in May, Don’t Return ‘til St Leger Day” crowd, and the “As January Goes, So Does The Rest of the Year” cult.

Yes , I know I’ve mentioned them all before, but according to Investment Association statistics measuring where people are investing their savings, too many investors either panic because of shock horror headlines or are too active for their own good, chasing the latest hot sector.

Take a September report from the US, for example. It covers actual portfolio returns of half a million private US investors with an average portfolio size of $400,000, over the period of the last six months.  

You may recall that worldwide, stock markets in January and February posted their worst start in 80 years. At least that’s what we were told. Me? I just ignore headlines. You should, too. 

As a consequence most of the investment herd were particularly nervous and emotional. The report compared investment performance between those who believe in Buy and Hold against other groups who actively Buy and Sell.

There were three categories measuring short term activity. The first was those who turned over less than 10% of their equity holdings, the second group moved up to half their holdings (actively managed) and the third group moved more than half their equity holdings (aggressively managed).

The results are stunning. Portfolios with little change actually made a small loss 0.5%. But those who switched up to half their portfolio showed an average loss of 6% and those who aggressively changed their investments lost on average 12%. Wow.

What’s remarkable is that no group showed any gains. Now, you might think that’s hardly surprising given all the negative headlines, but reality for patient equity investors this year is completely different.

Since Brexit on the 23  June the FT All share Index Total Return (TR) is up 9.1%. Over in the US the S&P 500 TR is up 16.8%.  Yes, really.  

Over the last six months the FT All Share TR is up 14.4%.  The S&P 500 TR is up 16.3%.

But those rushing into Absolute Return funds, and there are thousands of investors doing so, have not fared well.  Standard Life’s GARS, the biggest such fund by miles, has fallen in price by 0.85% over the same period.

But how does all this compare with the best well managed active equity funds? As you may know by now I subscribe to the Colin Powell System of Success: that it comes from Preparation, Hard Work and Learning From Failures. I’d add that Patience and Passion are much needed ingredients, too.

Recognising the fact that human beings dislike losses at least twice as much as they enjoy gains  I’ve long subscribed to the Brian Clough Theory of Building Successful Teams. He believed in constructing a spine of the very best players from the goalkeeper, defender, midfielder  through to the striker. And then fit the rest around them.

My spine over the last six months, back to front, is David Jane (goalie) up 8.7%, Neil Woodford (centre half),up 11.2%, James Harries (midfielder) up 16.8%, and Terry Smith (striker) up 19.2%. And they’ve been in these positions for years because I’ve known what they can do…for many years.

Do I see any need to change them? No. Neil and Terry, of course, are player managers nowadays as is David, and James is set to go down the same road.  And they invest their own funds with mine. Even better. 

Meanwhile, over in the US , one of our “scouts” Vincent Deluard is of the same view as others like Ned Davis Research to whom we pay close attention. He believes the future is brighter than most investors think,  whoever wins the US Presidency, and that any short term weakness in share prices is an opportunity to tuck more away. Sounds good to me.

Alan Steel is chairman of Alan Steel Asset Management

Alan Steel Asset Management is regulated by the Financial Conduct Authority. This article contains the personal views of Alan Steel and should not be construed as advice. Do check your individual circumstances with your advisers.

This is a regular column submitted via the DBdirect service. For details click here.


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