‘The Tortoise heard his taunting jeer…But still resolv’d to persevere’ – Robert Lloyd
As January draws towards a close there is only one conclusion you can draw about global equity markets: they have had a super strong start to 2018. Actually the strong start has surprised many as a number of well-known strategists have suddenly seen their 2018 year end stock market targets breached just a few weeks into the year. Now that is a bit embarrassing…unless January is not going to be indicative of the rest of the year.
In a strange way I am reminded of the Tortoise and the Hore fable. Markets have acted like the hyperactive Hare both in recent weeks and over recent months. There is of course nothing wrong or strange about this – as anyone who has followed stock markets for more than a few years knows, there are clear cycles which are deepened by both fear and greed. The trouble comes when professional or amateur investors act like the Hare in the famous story.
The most dangerous word in finance in my opinion is ‘extrapolation’ or a general feeling that because something is going a certain way, then that has to be the direction over the next little while. We like trends or themes that allow us to make investment choices that offer the scope to make a contribution to our Fund for many months or maybe even a few years but the key is not to take anything for granted and mindlessly extrapolate. The key is always to ask yourself at today’s share price if you had to buy an investment afresh would you do so or not? If the answer is not a ‘yes’ then maybe you should not be holding it at all. This is one of the reasons we celebrate taking profits on investments and often comment that whilst a company is still sensible and being managed correctly, it no longer as attractive for an investor over the next little while. Unlike the Hare in the famous fable we don’t like to fall asleep (on our portfolio holdings).
The Tortoise investor meanwhile struggles with rarely being the fastest, the most fashionable or the most feted. However by focusing on keeping on putting one foot in front of another progress continues to be made. We are not ashamed about taking some profit on our investments or considering investment opportunities that are not on the front pages of the financial press. And it is funny how such a focus is often the one which allows a more frequent crossing of the individual investment finishing line.
As for the problem – as explained in the first paragraph – that many well-heeled investment strategists currently have I would imagine the sight of a few upgrading the estimates and predictions they so carefully put together just a few weeks ago will mark an important psychological capitulation moment. If sufficient has really changed to allow such changes to be justified then the global corporate earnings season – which hits full throttle this week with getting on for a third of the S&P 500 and nearly a quarter (by market capitalisation) of the FTSE-100 publishing their results – then there will be lots of positive surprises. Given the excitable nature of financial markets before the publication of these numbers the risk is more skewed in aggregate towards indifference or disappointment. Tortoise-like however we will continue to ponder and review all the data from both current and potentially prospective Fund holdings. There is no resting on the job here.
As always with financial markets it is better to react rather than predict. Extrapolation after all is the most dangerous word in finance…