Stick­ing to the plan When the mar­kets are volatile, hav­ing a fi­nan­cial ad­viser is the best way for in­vestors to keep the emo­tion out of it.

Finweek English Edition - - MARKETPLACE - Ed­i­to­rial@fin­week.co.za is di­rec­tor and re­gional head: KwaZulu-Na­tal at Ci­tadel.

atthe age of 19, War­ren Buf­fett read Benjamin Gra­ham’s In­tel­li­gent In­vestor and cred­its it as one of the luck­i­est mo­ments of his life, pro­vid­ing him with the in­tel­lec­tual frame­work he needed for in­vest­ing.

In ex­plain­ing why that was so im­por­tant, Buf­fett said: “To in­vest suc­cess­fully over a life­time does not re­quire a strato­spheric IQ, un­usual busi­ness in­sights, or in­side in­for­ma­tion. What’s needed is a sound in­tel­lec­tual frame­work for mak­ing de­ci­sions and the abil­ity to keep emo­tions from cor­rod­ing that frame­work. This book pre­cisely and clearly pre­scribes the proper frame­work. You must pro­vide the emo­tional dis­ci­pline.” Buf­fett’s recipe for suc­cess is there­fore sim­ple:

Have a sound in­tel­lec­tual frame­work for mak­ing de­ci­sions;

Pre­vent emo­tional ero­sion of that frame­work. Let’s un­pack this idea a bit by look­ing at re­cent mar­ket move­ments and the as­so­ci­ated de­ci­sions made by those in­vested in these mar­kets. The abil­ity to sep­a­rate emo­tion from de­ci­sion-mak­ing is in­her­ently ham­pered when one’s own in­ter­ests are at stake. In­vest­ing other peo­ple’s wealth is gen­er­ally eas­ier than in­vest­ing your own for one sim­ple rea­son: con­trol over emo­tions. It’s nat­u­ral to be less emo­tional about some­one else’s money than about your own.

When the mar­kets be­come ex­tremely volatile and there doesn’t ap­pear to be a clear con­sen­sus on what is go­ing to hap­pen next, panic can eas­ily set in and in­vestors of­ten be­have par­tic­u­larly sen­si­tively in re­ac­tion to such volatil­ity. And when in­vestors are ner­vous, they aban­don their in­vest­ment frame­work in the hopes of shel­ter­ing their as­sets from fu­ture ero­sion.

What hap­pens ul­ti­mately? When the mar­ket be­gins to cor­rect, in­vestors re­turn, but by then it’s of­ten too late. They’ve missed out on part of the up-cy­cle af­ter hav­ing al­ready sold at a low level.

Hyper­sen­si­tiv­ity to mar­ket volatil­ity is a de­stroyer of suc­cess­ful in­vest­ment per­for­mance. It would be won­der­ful if, just like Brian Finch in the TV se­ries Lim­it­less, we could take an NZT-48 pill and per­fectly time the mar­ket. But, sadly, no­body can time the mar­ket and it’s un­safe to make con­jec­tures about its ebb and flow: an in­di­vid­ual’s fi­nan­cial sta­bil­ity and liveli­hood could be at risk.

So how can in­di­vid­u­als look­ing to in­vest their wealth make bet­ter de­ci­sions? How can in­vestors sep­a­rate their emo­tions about in­vest­ments to help them make bet­ter de­ci­sions in any given sce­nario? The an­swer may take many forms, but a proven win­ning al­ter­na­tive is to seek fi­nan­cial ad­vice. To use an ob­jec­tive out­side re­source to negate our emo­tions, es­pe­cially those tied to our hard­earned cash.

Look­ing at the rand and the cri­sis it ex­pe­ri­enced dur­ing 2015: we see the cur­rency de­pre­ci­ated against the dol­lar by a mas­sive 35% with sig­nif­i­cant swings both ways since. This level of volatil­ity is not sur­pris­ing given that the rand is pos­si­bly the most traded emerg­ing­mar­ket cur­rency and emerg­ing mar­kets as a whole have come un­der sig­nif­i­cant pres­sure. Un­der­stand­ably, panic and a neg­a­tive do­mes­tic eco­nomic out­look have gripped South African in­vestors, who are now clam­our­ing to in­vest off­shore.

The key ques­tion, how­ever, is: isn’t it too late? Why in­vest off­shore now when the rand is close to R15/$? Why didn’t in­vestors ex­ter­nalise as­sets at R 7/$ or R9/$? Some of the big­gest fund win­ners in rand terms dur­ing 2015 were funds in­vested in off­shore hedge funds, prop­erty and eq­ui­ties. This is not due to per­for­mance, but rather cur­rency con­ver­sions. Af­ter wit­ness­ing this phe­nom­e­non, in­vestors are now look­ing to in­crease their off­shore ex­po­sure on funds that were bal­anced 30:70 off­shore/lo­cal di­ver­si­fied to 50:50 and even 60:40 in favour of off­shore as­sets. We have seen this pat­tern be­fore as in­vestors flood into the mar­ket on the back of re­turns as op­posed to in an­tic­i­pa­tion of them.

This is where a fi­nan­cial ad­viser can help iden­tify in­vestors’ hyper­sen­si­tiv­ity to mar­ket and cur­rency volatil­ity. It’s ex­actly this type of im­par­tial anal­y­sis that helps them see the big­ger pic­ture. Too of­ten in­di­vid­u­als are only able to look at the world econ­omy through a mi­cro­scope, see­ing the ef­fects of the mar­ket only by virtue of their port­fo­lio’s per­for­mance.

How­ever you choose to in­vest your funds, make sure it’s for the right rea­sons, seek­ing dif­fer­ent, un­cor­re­lated re­turns and not just a knee-jerk re­ac­tion to ex­tra­or­di­nary eco­nomic times. Hav­ing a doc­u­mented plan and stick­ing to it with the guid­ance of a qual­i­fied, ex­pe­ri­enced and ap­pro­pri­ately in­cen­tivised ad­viser is the best way to achieve this.

War­ren Buf­fett Busi­ness mag­nate and in­vestor

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