It seems easy to spot a buying opportunity: companies start to thrive below the radar of market watchers and we may have by sheer chance uncovered a growth story; companies fail conspicuously and are punished by the markets beyond reason as a cool-headed investor may have realised; economic crises push stock valuations far below their intrinsic value and earning potential and the astute will take advantage. Investors react to sentiment, infected by collective fear.
Be greedy when others are fearful, goes the adage, buy when valuations are down. It is by far more difficult though to sell at the right moment. Be fearful when others are greedy. But who wants to miss out when others still dance?
We retail investors are loss averse, and blinded by sudden success, which is not the same thing. When a stock slumps we suffer, yet as long as we refuse to sell, losses will not materialise. The pain of loss can be too high for our emotional well-being to do the right thing. We will hope beyond reason and will miss the last possible exit.
This happened to me in 2014 when I was too slow to come to my senses when Portugal Telecom shares started their free fall after it had become apparent that the Spirito Santo family had used the telecom company as an ATM to the tune of hundreds of millions.
On the other hand, an investment might look so unexpectedly successful that we start to fear our luck and want to pocket the gains. Think of the unexpectedly lucky who-wants-to-be-a-millionaire dodging the next question. It takes a steady hand to not cash in when a stock soars 100 per cent or more within a short period of time.
More experienced investors than we will sell at early warning signs and stay put so long as a stock keeps rising. After writing my birthday wishes for Amazon in this paper, I decided – against my public warnings – to buy shares at the hefty price of $950.
I knew that this was expensive, hence my warning. But then, Jeff Bezos’ company seemed to get everything right, gaining market share relentlessly in any field of business it pursued and growing beyond a retailer’s wildest dreams.
Bezos’ Achilles heel was its highbrow paper, the Washington Post, which criticised and ridiculed Donald Trump on a 24-hour basis. He duly started to lash out, threatening the breakup of America’s most successful internet retailer.
The President’s tweets reached fever pitch and, fearing his lack of coherent reasoning, I decided to sell. At $1,450 I had earned more than 50 per cent already. My conviction that the stock markets’ bull run was approaching its end helped to make up my mind.
This was in February. At the time of writing Amazon stands at $1,822 – I could have doubled my initial investment, even more so as the POTUS’ tweets have found many more victims other than Bezos. The investor advice to “never change a winning horse” I had ignored at a loss.
Then, as readers may recall, there was my stormy love affair with the trading cum mining company Glencore, by many yardsticks one of the most successful trading operations in history. When I wrote their story for The Sunday Times of Malta I had to admit that the helter-skelter fluctuations of Glencore’s share price proved too much for my feeble nerves. I sold out at $340, admitting ruefully that I had missed out on a rally to $400 up to June. I reasoned that its hard-charging, risk-taking CEO and majority shareholder Ivan Glasenberg might one day induce yet another collapse of its share price.
In the meantime, the US Department of Justice is investigating the Swiss trader over bribery and corruption allegations in the Congo, Nigeria and Venezuela, emphasising “corrupt and opaque mining deals in the DRC”. It certainly did not help that Glasenberg decided to pay the Israeli businessman Dan Gertler, who was just recently punished by a US embargo, hundreds of millions in royalties. The ruse that payments were made in euro rather than dollar, was not taken gladly by the DoJ. The share price started to fall and stands at $309 at the time of writing. My timing was not perfect, yet my decision sound.
There is little scientific explanation for the reasons behind the October routs
The investor advice “sell in May and go away” is anchored in the long-term observation that stocks hardly move at all over the summer period from May to October, while most gains are observed during winter time. This was certainly true when English gentry decamped from the City of London to their country estates, to enjoy rare moments of good weather and the beginning of the shooting season (August 12).
In times of 24-hour trading, thriving derivative markets and permanent news coverage, this alleged nexus has disappeared. What remains though are the notorious October rifts (think of the stock market crashes of 1929 and 1987, and the 2008 recession – so far the worst decline of stock markets in history) and the almost routine August upheavals in Russia.
There is little scientific explanation for the reasons behind the October routs. My guess is that cracks which start to show in the summer months are not noticed during vacation times, but become critical once traders and financiers are all behind their desks again.
The Russian disruptions which regularly take place in August have a similar reason: key players are safely away on holiday and scheming finds little resistance.
The August 1991 putsch of the die-hard communists against Gorbachev come to mind, the invasion of Georgia in 2008 and the ‘currency crisis’ of 1998, which was not so much a crisis but a glorious opportunity for Russia’s oligarchs to fleece international investors like the LTCM hedge fund, the IMF and the World Bank within a few days.
The amounts stolen from the gullible West through exchange rate manipulations, loan conversions and staged defaults are still mind-boggling – the IMF alone lost $13.7 billion without much protest. Khodarkovsky, the West’s poster child of Putin-resistance, made a killing, bankrupting his Menatep bank in Moscow, to open a new Menatep in St Petersburg moments later and a few billions richer.
So should we better heed the sell-in-May rule? I do not think so. As I have argued in earlier columns, it is impossible to ever figure out with much certainty when markets will turn.
Very few people will be as lucky as John Paulson, who gained notoriety with his correct gamble on the implosion of the sub-prime bubble.
We should collect evidence, stay alert, and be more cautious when stock markets are high for a very long time. The latest wobble in commodity prices and the seemingly invincible advance of single sectors like technology or healthcare are not a signfor changing fundamentals but of a slow retreat from the broader market.
Eventually, the FAANGs (Facebook, Amazon, Apple, Netflix, Goggle) and their Chinese counterparts the BATs (Baidu, Alibaba, Tencent) will fall too with the receding tide and we will see who was found out “swimming naked”, as Warren Buffet once commented wryly.
It is not the time now to stay fully invested as we will need cash to jump on the next round of buying opportunities. Just when this will be we don’t know. To keep more cash and not to stay fully invested may prove a sensible strategy now, even when losing out on the effects of compounded interest and dividend payments. Once recession strikes, it is important to stay calm. To sell in panic is hardly a sound sales strategy either.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.