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Investing during a sell-off

Responsible investing is about balance, diversification, liquidity and the long-term. But this investment year is not turning out to be simple to interpret. As investment managers we are being forced to put in one pot exchange rates, economic growth, increasing interest rates, quantitative easing, BREXIT and Donald Trump. With all these moving parts, ultra-low interest rates and high valuations it is becoming harder to define sensible investing.

I am also pretty convinced that some with a law degree and a booklet of guidelines feel inclined to have clients keep all their money in some bank deposit with zero interest rate, or a bullet bond with a negative yield. Playing it safe definitely leads to fewer complaints and probably less work going forward. But ‘No risk means no return’ so risk elimination is not an option.

And that is not what we do, and also because there is another reality which says that the best deals are made when markets are down not up. Warren Buffet, the great man himself, was once quoted as saying ‘when everyone else is selling I am buying’. So if you are inclined for some additional risk, your safe assets are… as safe as they currently can be… then how do you play the current market sell-off?

A simple fact of life that is not given its due is that most investors want to make money. As simple or funny as it sounds, risk management, diversification, theories about where you should place your eggs, etc., have absolutely no value if in the end you do not make any money. For most investors money is there to make money, otherwise it is pretty useless. This partly explains why investors and market participants keep on scaling down the risk ladder in search of anything that provides return.

And at time of crisis, when most markets are selling-off, when asset prices are heading towards the bottom; everything starts coming together. Bond yields may suddenly look decent and equity prices are once more attractive. Unfortunately or fortunately, at this point human nature kicks in. The optimism and carefully laid out plans are much more difficult to implement when markets are down 10 percent. Fear start to eclipse the investment outlook.

But when just looking at the red glow coming from CNBC is enough to give Dracula cold feet, when colleagues are calling for a bit of hopeful advice, when meeting prospective clients becomes an exercise in diplomacy; that is when your notes tell you that it is time to buy and that is in reality the most difficult time to buy.

Unfortunately, during this period several investors will lose money as their clumsy attempts at making a quick buck or recover losses will go haywire. A lucky few will make money, lots of money if they will play the right cards at the right time. Patient and experienced investors will probably do fine in the long-term as current asset prices may be below their fair value.

Thus on a scale that stretches from gambling to investing, the needle has just moved a few notches in February, in my opinion towards the investing part. I still have a soft spot for large cap European equities. If you are already invested in this asset class, riding the volatility may be a good idea. Investors with extra cash may consider adding to this asset class during this period. Expect above normal price movements in the short-term, but valuations more attractive compared to what they were a few weeks ago.

My philosophy remains constant; buy only the best, hold until it remains the best and get rid of losers. Only buy a share if you like the company’s product and only buy a bond if it can pay back its debt. Finally always keep in mind that the higher risk/ high return mantra may work both ways.

 

This article was issued by Antoine Briffa, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice

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