Steve Thaxter- Senior Partner and Principal Adviser
Sovereign Wealth Partners
If we’re fully invested it’s only natural to feel very uncomfortable when markets start to fall. And yes markets have fallen pretty hard as Central Banks around the world have brought forward their plans to stop printing money and raise interest rates.
As I write this on Friday 4 Feb, the Australian stock exchange is down around 7% from early 2022 highs, a modest recovery from the 10% loss a few days ago. The story is similar over in the US, with the biggest carnage seen in the growth tech sector.
So, should we sell out? After all, markets are still expensive by historic standards, and we want to hang on to the hard-earned gains we’ve made. But if we do sell out, we’ve got at least three new decisions to make:
- What do we hold in the short term?;
- When do we re-establish our long term holdings? and
- What investments are they going to be?
If that’s not hard enough, we’ll only be successful if we get all three decisions right AND reinstate our portfolio before the market recovers. .
And yet selling stocks has to be part of the investment process. Change and disruption is everywhere. Very few companies hold on to market leadership positions for long. So, what’s the answer?
For a long term investor the correct selling discipline is a judgement about relative value. It’s not just about what’s in our particular portfolio – whether we should be “taking profits”, “cutting losses” or “averaging down”. Just looking at our own particular investments is a half-truth that ignores the relativity of what we own today compared to the pricing and potential of everything else that could be bought.
Legendry investor Howard Marks has devoted the whole of his latest newsletter to a discussion of the Art of Selling. Very much worth a read. The psychology involved is full of wrinkles and pitfalls, but at its heart it’s an ongoing judgement of relative value in the context of all that’s happening. The context is not just about investment markets, it’s about individual investors too. Well run portfolios can be very different from each other since the whole point of it all is to deliver the cashflows and growth to bring about the investor’s unique aspirations.
Right now there’s a huge amount going on in investment markets as we ponder a regime change towards inflation, tighter money conditions and ever ongoing COVID disruptions. Stocks are falling in and out of favour quicker than ever. But time is on the side of the long-term investor making it much easier to ignore the short term noise and consider the long term potential. We certainly don’t want to suffer losses beyond our clients’ risk tolerance but we also know that markets have always gone on to new highs as the earnings of solid underlying investments prevail.
For us at Sovereign Wealth Partners it’s about periodic rebalancing where we lean into the best long term relative value across the investment spectrum, having taken the client’s circumstances, money flows and risks into account. This is a constant process and is a selling discipline in itself.
At the stock level, we rely on our fund manager partners to maintain portfolios with highly prospective returns, selling anything that would no longer make it into the “A” team. For the specialist managers there’s no shame in dropping a stock back to the reserve bench if the market conditions are not currently suitable.