Beat the sharemarket herd

Volatility can be a great opportunity if you understand how to beat the herd

For the Marcus Today team and the growth portfolio we manage for investors ($55 million), Covid-19 was not a disaster. The sharemarket volatility proved to be a fabulous opportunity instead. Our Growth Separately Managed Account (as at June 10) has outperformed the ASX

300 Accumulation Index by 26.87% since the coronavirus hit on February 20.

And when the market falls over again we will see another fabulous opportunity beginning. But how did we do it? At the risk of letting out our secret herbs and spices, here are 18 ways to beat the herd. These lessons are not for everyone, and most fund managers are too big to do this, but it is something to pin on the fridge.

• Have the ability and bravery to go to 100% cash. Most fund managers can’t, but as an individual investor you can.

• Work with a small team, not alone. You need bouncing boards, other intelligent, engaged people on an assortment of wavelengths. People who are objective, are not easily intimidated and speak freely. Working alone means more mistakes. Too big an investment team constipates the investment process. You need something in the middle.

• Be unemotional. It takes a lot of experience to be truly objective. If you ever “love” or “hate” a stock, you’re missing the point. You can’t invest on feelings.

• See every moment as an opportunity. Volatility provides opportunity, especially the disasters. This is when you get off the sideline and play harder.

• Don’t focus on the long term all the time. Long-term, bottom-up stock picking doesn’t work all the time.

• Don’t make grand predictions about the future. This is how some investors think the market works – it is not. It’s called guessing. React, don’t predict.

• Don’t ever think or say “it’s okay, it’ll be all right in the end”. It is a professional cop-out.

• Put asset allocation before stock picking when necessary. Sometimes the whole market moves and you have to do something about it no matter the quality of the stocks you hold.

• Stock-pick on themes. There are tides in the stockmarket, lots of them. Swim with the tides not against them. Get the themes right and the stocks pick themselves.

• Watch the herd, don’t join the herd. Spotting the herd’s change of mood requires you to have your finger on the pulse of the market, all the time.

• Know that at times the quality of the stocks we hold will not make any difference if the market collapses.

• Be decisive. Be bold. Volatile markets are not for the timid.

• Make decisions fast. In a world of algorithms, computer-driven trading and the new one, ETF selling, you don’t have as much time as you used to. When precipitous moments come, do something.

• There is never a rush to buy. Confidence is three times harder to generate than fear. Some people embarrassed themselves in the February correction, calling the bottom after a week. Corrections start fast and trend. Believe the herd even when they sell quickly. They are bigger than you are and prone to hangovers.

• Be flexible of mind. Don’t get set in your opinion. Don’t be a bull or a bear.

• Sell easily. Most investors find this very hard, having been indoctrinated by the sanctimonious “Buffetesque” sycophants into believing that investment is about fundamentals and the long term, and that’s that. It’s not.

• Being hyper-vigilant. Reassess every setting all the time.

• Be nimble. You can’t do that when you run billions of dollars.

I remember a time in the tech boom when Andrew Bell, of Bell Securities, interrupted the morning meeting frenzy of tech ideas and said: “Stop, everyone. Look around you. You [pointing at a young dealer] did $11,000 of commission yesterday. A year ago you were selling mobile phones. And you, you just employed a dealer’s assistant. A year ago you were a dealer’s assistant. So just stop and look around. It doesn’t get to look any better than this in the stockmarket.”

It was the top of the tech boom and the tech wreck was just about to start.

And as the market reverses once again, the time has come to do something. This is where so many fund managers and investors go wrong. When the going gets tough, they do nothing.

Marcus Padley is a stockbroker with MTIS Pty Ltd and the author of the daily sharemarket newsletter Marcus Today. For a free trial go to marcustoday.com.au.