How to ride the stockmarket wave

Volatile markets are manna from heaven for investors who hold their nerve

Steve Johnson and I grew up together in Wellington, a small rural community in central western NSW. In Year 12 our economics class took part in the ASX’s sharemarket game and we teamed up, finishing third out of more than 1500 teams after finding a quirk in the system related to the time it took to post the discs back and forth between the ASX and our school.

Splitting the $500 prize money was a great result, but we had an awful lot to learn. We moved to Sydney together in 1996 and soon after discovered the philosophy of value investing – the idea of figuring out a stock’s true or “intrinsic” value and trying to buy for substantially less than that. The wisdom of Warren Buffett and his teacher and mentor Ben Graham became our philosophical north star.

Steve and I were fascinated by human behaviour and what we’d later hear Buffett’s business partner, Charlie Munger, term “the psychology of human misjudgement”. We quickly learnt that sharemarket investing sits at the intersection of business, mathematics and human behaviour.

In 2004, with some real-world success (and failure) under our belts, we purchased the Intelligent Investor sharemarket advisory

service with the support of some brave financial backers. There we took our knowledge and experience to a deeper level, providing analysis for and engaging with tens of thousands of investors.

We had triumphs and disappointments over the next few years and then along came our biggest challenge, the GFC. There were many difficult days heading into the teeth of the GFC, but out of the depths of that episode we recommended some life-changing investments to our clients and profited handsomely by investing alongside them.

Yet, in the aftermath, a number of clients confessed that they’d simply frozen up during the turmoil and not acted on our recommendations. These people admired the value-investing philosophy and appreciated its logic, but they simply didn’t have the stomach to apply it.

It was for those people that we set up what is now Forager Funds Management, with Steve as its chief investment officer.

‘Get back on the horse’

The behaviour of markets in 2020 has had some echoes of the GFC and Steve recently took to Twitter (@ForagerSteve) to make some timely comments:

“Spoken to a couple of Forager investors this past week who are completely oblivious about how their funds are performing. Switched off in March/April and haven’t wanted to look … If you are managing your own savings, you need to get back on the horse. There are very important asset allocation decisions to be made and you must think rationally about them.”

Classic Steve. He understands the mathematics behind the fact that low share prices are the seeds from which exceptional returns grow. He also knows from long experience that, behaviourally, many people freeze up when markets become volatile. Or, worse, they panic and sell. But the bittersweet truth is that those who both understand and are able to act on the value investing philosophy thrive on such widespread behavioural malfunctions.

On March 26 this year, which turned out to be the week markets bottomed, I tweeted “many shall be restored that now are fallen”.

It’s a quote from Roman poet Horace that was used by Ben Graham at the beginning of his magnum opus Security Analysis. And since that tweet, a remarkable restoration has occurred.

Markets have staged a broad recovery, with the All Ordinaries Accumulation index up more than 40% since the bottom. As I write, the Forager International Fund is up more than 50% and the listed Australian Fund is up a remarkable 120% from its March low. Though Steve would surely want me to point out that the Australian fund’s performance had been disappointing for the couple of years before this breathtaking surge.

So did you freeze or flourish in the financial markets chaos of early 2020?

If you felt the fear and sold into the panic, don’t beat yourself up too much. The potential impact of a global pandemic in an internationally connected world was terrifying to contemplate. And as someone with a lung condition, I felt a level of existential fear, which was compounded by the turmoil in financial markets.

Yet through a combination of predisposition and self-training, I was able to keep a steady hand on the tiller and ride the remarkable rebound in many of my favourite stocks such as Pinnacle Investment Management, Lovisa, Magellan Financial Group, Globe International, Swick Mining Services, PPK Group and Frontier Digital Ventures. A few haven’t bounced back so well, like Matrix Composites and Engineering, Platinum Asset Management and Smart Parking but, overall, the portfolios I manage are up more than 100% from their March lows and now within a few percent of their pre-pandemic highs.

Greg Hoffman is an independent financial educator, commentator and investor. He is also a non-executive director of Forager Funds Management (not involved in Forager’s investment process).

Disclosure: Private portfolios managed by Greg Hoffman own shares in all of the companies mentioned in this column.