A WORD FROM OUR CIO - PSG

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prepared investor already has a clear sense whether the market is overreacting or not. ... Preparation in today's compet
A WORD FROM OUR CIO Success during volatile times is a product of preparation

Adriaan Pask PhD CIO PSG Wealth

More than a century ago, Louis Pasteur said, “Chance favours only the prepared mind.” By this he meant that sudden flashes of insight don’t just happen— they are the products of preparation. Why do most novice investors run at the first signs of volatility, while professional investors see opportunities?

Professional investing is a mindset

Why the focus on ‘opportunity seeking’?

Preparation is an integral element in investment success. When negative sentiment rears its head about a specific company, or geopolitical events cause sudden bouts of market volatility, the prepared investor already has a clear sense whether the market is overreacting or not.

If we were to follow our emotions, we would probably prefer to wait until all the indicators were undoubtedly positive. The problem with this strategy is that we would probably also be investing near the top of the investment cycle, when opportunities to the upside may be low.

Over the short term, markets are often irrational and indiscriminate. Within this atmosphere skilled, professional investors know where to search for opportunities, whilst unprepared investors often run for the exits to avoid potential losses that may, or may not, occur. I should also add here that ‘professional’ and ‘novice’ are more a reflection on your mindset than your employment status. Professional investors take the time and energy to understand their own behaviour, and that of the markets.

Opportunities, on the other hand, are frequently made at the bottom of the cycle when things look a lot less certain. Having the conviction to invest when the conditions are less clear takes preparation and confidence, but often presents the least opportunities.

Characteristics of novice and professional investors The prepared investor seeks opportunities in confidence, created through preparation, while the unprepared investor most likely seeks shelter from uncertainty in cash or similar instruments. Preparation in today’s competitive market is truly a distinguishing trait. Professional investor

Novice investor

The key is preparation that ultimately facilitates emotional control To see opportunities, one needs to be prepared. Preparation in this instance is the knowledge, research and experience in a specific sector, company or asset class. When the market starts to drive prices down, the professional investor will, for example, already sense if these price movements are fair for all companies in the specific sector. They do not start researching when volatility strikes – their preparation and research is already done. Their models have been built and updated. When the market suddenly trades down a share from R100 to R60, a professional investor already has a good sense if this adjustment in the share price is fair, or perhaps an overreaction, and therefore a potential buying opportunity.

How to become a professional preparation

reactive

confidence

uncertain

opportunity seeking

safety seeking

Source: PSG Wealth research team

Over the last few years, professionals have increasingly come to understand that managing human behaviour is a key factor in determining investment outcomes. Our own behavioural biases are often our biggest downfall – as we have argued in a number of the articles in last quarter’s issue of The Wealth Perspective. However, all the knowledge in the world could prove useless if we cannot control the emotions that often spur us to make impulsive decisions. As one of the founding fathers of the United States, Benjamin Franklin once said: “By failing to prepare, you are preparing to fail.” So rather do the opposite and prepare to succeed – or at least trust someone who is prepared – to assist in your investment success.

SECOND QUARTER 2017 | 3