2011: How market timing means missing the gains and thus underperforming the market

by Ashik Shah on 30 April 2011

In the last quarter, markets have been very buoyant, while Kurm Investments Inc.’s NAV has remained largely flat.  However, this NAV reflect substantial recovery from the extreme lows of the credit crunch.  Kurm has survived many crises and witnessed many bubble during its 13-year history.

Much has changed in the world over that time, with the embracing of internet and mobile technologies and so much progress in emerging markets.  Yet human nature remains the same – prone to speculative excess.  Excessive optimism after asset prices rise and extreme pessimism when they fall.  As often discussed in my letters, such habits have served market participant badly.  They meant that many capitulated in 2009 and stayed out of the markets in 2010.

Market performance data do not reflect the actual experience of market participants.  Many people crystallise losses at or near the bottom only to miss major upward movements in markets in which they have become too afraid to participate.  The only way that an investor can avoid the influence of crowd psychology is by developing an independent, contrarian perspective.  Such a perspective can be supported, or even anchored in, a sense of the intrinsic value of the underlying businesses in which the investor is invested.  With these values in mind, an investor would never have sold sound businesses at the prices available in the market in 2009, unless forced to by leverage or forced redemptions.  Such thinking clearly indicates that a value investment strategy and prudent avoidance of forced selling by avoiding excessive leverage, for example, will help investors preserve and grow capital.

Today’s environment is again volatile and uncertain.  While the credit crunch is over and the financial system is no longer in danger of bankruptcy, the capital-strengthened banks are still reluctant to lend to entrepreneurs, while the quantitative easing has also effectively ended.  High inflation and tightening monetary policy in emerging markets has also impacted global growth.  The continued tension in the Middle East and North Africa (MENA), and the consequences of earthquake, tsunami and nuclear risks in Japan are weighing heavily on the world economy through the price of oil and disruptions in global supply chains respectively.  The issues and Greece and other peripheral European economies are also adding to the confusion.

In such an environment, prudent investors should remain prepared for the worst but at the same time make sure that the take advantage of others’ fear and greed.  Kurm has recently invested in MENA, and the Eastern Europe/ CIS, and also in African private equity.  At the time of writing, investments have also been made in Vietnam and Japan.  The portfolio in North America is dominated by financial services firms whose market prices have fallen since the end of the quarter (and this will be reflected in future NAVs), but whose values remain very cheap, even taking into account market volatility and contagion from any defaults in Europe.

As ever, any family wishing to preserve and grow capital will be served well by objective, contrarian, value-driven, long-term focused investment.

Subscribe for regular updates

The views expressed and comments made on this website are not personal advice based on your circumstances. The purpose of this website is to provide information and analysis to help you make your own informed investment decisions. If you are not confident making your own investment decisions you should contact a firm which is authorised and regulated by the Financial Conduct Authority (such as Ashik Shah & Co. Ltd.) so that a qualified financial adviser, after considering your personal circumstances and investment objectives, can make personal recommendations of investments which are suitable for you. Whether you make your own investment decisions or prefer to follow the recommendations of a financial adviser you should always remember that your capital will be at risk and that investments can go down in value as well as up.

Previous post:

Next post: