Friday 19 April 2019

Ignoring the noise is biggest challenge for long-term equity investors

 

Aquamarine fund manager Guy Spier moved his fund from Wall Street to Zurich (stock image)
Aquamarine fund manager Guy Spier moved his fund from Wall Street to Zurich (stock image)

Will Sparks

For investors, staying the course of an investment or financial plan has never been as difficult. From Twitter to television, we all can gorge on a plethora of instant news. The land grab for 'clicks', 'likes' and 'shares' encourages extreme and fear-inducing news stories. Nick Murray, the American financial planning sage, calls this tendency "headlines not history". Eventually this type of news simply turns into 'noise'. The noise can affect rational decision making - if you let it.

The investment industry can be the worst offender on this front. Analysts from some of the most illustrious investment banks are inherently fixated on the short term. Price targets and forecasts are often only six months ahead.

The best investors choose to ignore noise. Guy Spier manages the Aquamarine Fund, a value-investing equity fund which was inspired by Warren Buffett's original investment partnership. The returns on his fund have been nearly double the S&P 500's returns since the Aquamarine Fund's inception in 1997. In his excellent book The Education of a Value Investor, Spier recounts how he was a slave to the noise. He realised that this was one of his big weaknesses and to protect himself, he took some big steps. First he decided to relocate his fund from Wall Street to Zurich - far away from analysts, brokers and investment bankers. He then moved his Bloomberg terminal (the information supercomputer universally used by finance industry) out of his office and made sure he only checked the fund's stock prices once a week.

Esteemed author and economist Burton Malkiel once said: "I have never known anyone who could consistently time the market. And in fact I've never known anyone who knows anyone who was able to consistently time the market." Timing the market is a fool's errand; time in the market is paramount and often an investor's greatest asset.

In June 2007, global equity markets were just about to hit their peak. A few months later would see pandemonium and an extreme crash. One could argue that there was never a worse time to enter the equity market than June 2007. But what if you did? Surely the consequences must have been disastrous?

An investment of €100,000 in global equities (specifically equities in the MSCI World Euro Index) on June 29, 2007 was worth €191,430 as at November 27, 2017. By virtue of staying in the market, the investor is sitting on gains of over 90pc. It was not completely straightforward however: in this case, the investor's capital fell by 50pc in the first 20 months. The investor would have had to resist the urge to take action in that period, which was not easy.

It is hard to not be emotive about our savings or investments. Seeing your investment fall during adverse market conditions invokes emotion and thus a call to action. We need someone to talk us off the proverbial ledge when we are being irrational or have an itchy finger to do something. Therefore the role of your financial planner or investment manager has never been more important.

The only type of equity investment is long-term (that is, a five- to seven-year term) - anything less than that is speculation. Longer-term investors need to ignore noise and do nothing. Ignore analysts, politicians, economists: they all have a different mandate to you. Get in the market and wait. It's boring, it's unsexy, but it works.

Will Sparks is investment manager with Quilter Cheviot Investment Management (www.quiltercheviot.com/ie/private-client).

Any investment commentary in this column is from the author directly and should not be seen as a recommendation from The Sunday Independent

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