We’re at that stage in the investment cycle again. Despite everything that 2020 has thrown at investors, there is euphoria in global stock markets.
In the past few days I’ve heard two men swapping gold mining stock tips in a pub, have heard of a cabbie giving electric vehicle share tips, and of one plumber doling out biotech buys. Sure these themes are interesting but, as our analyst Alex Bryan points out in this article, a good story really doesn’t guarantee a good investment.
At a time when so much is still uncertain – Covid-19 cases are rising, a second national lockdown is potentially looming, and the state of the UK economy is patchy at best – it strikes me as almost perverse that there is so much confidence out there about which direction stock markets are headed.
Sure, you could argue that what goes down must, surely, come back up – and the FTSE is definitely still way down. But you could also argue that at the record highs it had reached before the March sell-off, things were looking stretched and a correction was due.
If you adhere to Warren Buffett’s principle of being fearful when others are greedy, then now is the time to be afraid – be very afraid.
Know When to Fold
There are countless ways to choose an investment. Maybe you believe a stock is undervalued, you’re a loyal customer of a brand so want a piece of the share price action, you admire a fund manager’s investment process and track record, or you simply want to track a given stock market for the long-term. Buy signals are based on our beliefs, our appetite for risk, and on valuations.
But how do you know when to sell an investment? We posed the question this week and examined some of the scenarios in which you might consider reducing a holding or getting rid of it all together.
Selling an investment isn't an easy decision. If you're selling at a loss, it's admitting defeat. If you're selling after a strong run, there's the fear of missing out on further gains. When I've hit the sell button in my own portfolio over the years I confess it's more frequently been to pocket gains: I sold a tech fund that I thought had gone far enough, a global fund that had doubled, and that blasted gold ETF the moment it was back in the black.
I've only once called time on a fund while it was still at a loss and it wasn't easy. We talk in investment about losses only being on paper until you hit "sell" and crystalise them, but sometimes you just have to call it. As Morningstar's excellent Dan Kemp has previously explained: a holding that falls from £100 to £50 and then to £25, isn't just an investment that lost 75% of its value, it's an investment that halved in value - twice.
Less is More
In an industry where bigger is frequently seen as better, it was surprising to see Liontrust's plans this week to streamline its fund range. Too often investment groups are all about More. More funds, More money, More customers. Unfortunately that philosophy rarely extends to More passing on the economies of scale to those customers and delivering benchmark-beating returns.
The More is More approach seldom works. Fund houses are frequently good at certain things and make a good name for themselves because of it. That doesn't mean they should start playing about in areas where they have no expertise.
At school, for example, I was good at English and History but rather lacking with a paintbrush and very nervous around a bunsen burner. So when it came to choosing my GCSE or A-Level subjects, I'd have been pretty foolish to plump for the subjects in which I clearly had no aptitude.
If Liontrust is tidying up its product range to focus on what it's good at, that is to be applauded. There are tens of thousands of funds available to investors, a few underperforming ones will not be missed.
