Sell low; buy high…Not!

I remember a great radio ad a couple of years ago by one of the unit trust mancos that feautred 2 opera singers. One sang (in a very deep/low voice) “buy, buy, buy, buy” while the other one sang “sell, sell, sell, sell” in a very high voice. The point was well made and is one that every investor should heed – you need to buy low and sell high, definitely not the other way around. Which is why I find recent articles and comments by at least 2 “prominent” sets of people quite disturbing. It could even be argued that ii possibly constitutes bad advice.

The first piece is a communique sent out by one of the asset consultants to their retirement fund members telling them that they no longer view a fund manager (RECM) as suitable and forcing their members to switch out of the fund (by a given date) or be switched out automatically. Surely this will involve selling the fund at a (very) low price only to invest in something else that has most probably already run quite hard over the past few years. In other words, they are being forced to sell low and buy something else high – locking in losses with little potential for recovery.

The 2nd piece is an attack on the fund manager (RECM) as well as Nedgroup for continuing to use them to manage their Managed Fund.

Let’s take a step back; the reason for the (very) poor performance is mining and resources shares – they have been decimated over the past ±2 years. They were cheap then and are even cheaper now. But to blame the fund manager for this is most certainly naïve and petulant.

The bottom line is that anyone who ever listened to RECM or read the Nedgroup Managed Fund fact sheets would have known that they were buying mining shares. This was a not a closely held secret. Problem is that no one ever expected the rout of mining and resources to be this long or this severe.

To my mind, full credit must be given to RECM (and one other value manager in particular) for sticking to their guns, for to sell out now would be to lock in losses for investors. Yes, if you believe that mining is finished forever then by all means sell out and invest elsewhere. But this is not the first time that a “value manager” has been lambasted or called stupid.

Anyone who was around in the late 1990’s will remember that Allan Gray almost had to close their doors as investors bolted out of value shares and into small cap and tech shares. And we all know how that one ended. With this in mind, there are at least 3 things that every investor needs to remember:

  1. The risk of investing in equities is great. There is ±20% chance of a negative return from equities (as an asset class) in any given 12 month period. This is the same for every 12 month period. Problem is that it happened so long ago that we all seem to have forgotten about it. And at the first sign of under-performance we bleat like a motorist getting a fine for talking on their cell phone while driving. If you want equity returns you need to be able to take equity risk and one of those risks is that sometimes the shares we invest in don’t give the returns we expect.
  2. Which is why diversification is key – never have all your eggs in one basket. If Nedgroup Managed (or RECM) is just one of 4or 5 funds in your portfolio then there should be no problem, unless of course the other 3 or 4 are also value managers. But then you were not diversifying in the first place.
  3. Mean reversion is a given – at some time in the future (we just don’t know when exactly) the pendulum will swing again in favour of mining/resource shares. I would rather stick it out until then than sell out now to buy something that has already run hard – it is a sure way to lose money forever. Remember 2005-2007 when we had a similarly divergent market, only then it was mining and resources that were the “darlings”. At that time these (value) managers were buying the very cheap financial and industrial shares and we were having the same discussion.sell low

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