How to manage market fear and uncertainty
7th January 2021 |
Do you remember early February 2020?
It’s almost a full year ago now. A YEAR! Geez that’s flown by.
But it’s a really long time ago. I’ll be the first to admit, my memory of February 2020 is a little hazy.
My son had a birthday. We had a bunch of friends and some family around. It was a fun start to the month – at least socially.
On the markets however, everything was set on one of the swiftest and most brutal market crashes we’d seen since 2008.
When it hit around 17 February, over the next four weeks, genuine panic beset investors.
It clipped values of a lot of investor portfolios, and also presented one of the most exciting opportunities to invest into the market we’ve seen in over a decade.
The crisis often opens up new opportunity. And the longer a crisis goes on, the longer a window of opportunity exists for investors.
But all crises come to an end. Likewise, all big opportunities have a point in which they take a turn for the worse.
However, when you balance up the crisis periods with the opportunity periods, on the balance of things, opportunity beats crisis long term.
That’s the kind of mentality you need to work with when investing in the market. It’s also the kind of perspective you need when there’s a lot of short-term uncertainty and volatility kicking around.
In crypto circles the term is “strong hands” which means holding on to your investments nice and tight. It means not getting too swept up in the short-term panic or fear, and also not getting overly carried away with any FOMO that might kick in should prices spike higher.
The term is equally relevant when investing in stocks. One of the failures that investors make is seeing a favourite stock start to ramp up in price – even when they’ve already got a position, they will buy more as the price continues to rise with the euphoria that the rise will continue to go higher and higher.
Likewise, in the first instance of a price that quickly clips off a few percentage points, there can be a gut-wrenching thought – what if it keeps heading lower? In this instance, many investors will sell a position, fearful of what comes next.
One of the hardest things to do as an investor is to maintain and keep your emotions in check. In fact, I would suggest that in being a successful investor, learning how to manage your emotions is the most important thing you need to master.
This ties back to the concept of having your own investment plan and within that your own goals for your investments. Without that, you’re very much more likely to succumb to the emotional peaks and troughs that investing delivers.
I wanted to focus on this idea today because right now we’re in another national lockdown and a critical moment with a lot of uncertainty and fear kicking about.
The hope is that by about mid-February we will be able to come out of this lockdown and sufficient vaccinations will mean a pathway back to living life again.
Almost exactly one year after the market crashed, everyone has pinned all hope on the vaccines working and us getting out of these lockdowns.
Even as you hear the politicians spin their drivel, they are all saying that the vaccine is our only hope to get through all this. Take that as you will, but it’s putting a lot of eggs into one basket. We all know that’s never a great idea.
Which means we also need to prepare for the eventuation that come mid-February things aren’t going as planned, and in fact we’re set in for more of this for more months.
Right now the market is pinning most of its hope to the fact that by mid-February and early March we’ll be home and free. I hope so too. But we also need to consider that it might not be.
If that’s the case and there’s more bad news to come and longer periods of lockdown, you need to prepare accordingly.
However, I also reconcile all this with the longer term view I have for our positions and the market opportunities that will present this month, next month, and throughout 2021.
For example, I look at something like Marston’s, Mitchells & Butlers or City Pub Group which have all been heavily hit from this crisis. And I ask, does the short-term potential of downside and fear with further lockdowns and a slow vaccine rollout outweigh my view on their longer potential for the rest of 2021 and into 2022?
In short, no. These are all stocks I believe that even if there is short-term bad news, the bigger longer picture is far better. That may present short-term buying opportunities, opportunities to add to your holdings, but the conviction around the idea underlying with them remains.
That’s how you need to approach your portfolio and holdings. Reference your original investment plan and strategy, understand why you’re in a position and what you hope to get out of it.
Understand what happens short term and the potential to alter those plans, but also remember what your bigger picture looks like and you’ll be able to navigate the ups and downs of the market with much greater success.
Aston Martin buy limit
Just a quick one on Aston Martin’s buy limit. We’ve had it recorded as 73 GBp in our portfolio. That’s due to the buy limit not adjusting in line at the same time the stock prices adjusted due to the AML stock consolidation event.
As you’re aware, Aston Martin undertook a stock consolidation off the back of its private and institutional placement last year. As that went into effect, there was a 1-for-20 consolidation of Aston Martin’s stock on issue.
As such, the stock price adjusted to reflect this. Our buy limit didn’t. It didn’t really make too much difference anyway as Aston Martin has been trading above the buy limit for a while now. But in the event it does trade lower, the buy limit needs to accurately reflect the state of play.
Hence the buy limit for Aston Martin is now 1,460 GBp – which is the previous 73 GBp limit adjusted for the 1-for-20 consolidation.
If Aston Martin trades below 1,460 GBp, it will move back to an active buy recommendation. But while it trades over the buy limit, it remains a hold.
Rolls-Royce returns in our portfolio
We’ve also had a few people query the price and return figures in our portfolio since the rights issue. As I said in my October update, we expected the price to trade lower towards the rights issue price – for more information please click here.
Due to the rights issue and trading price, I’m also adjusting the buy limit to more closely reflect the position of Rolls-Royce. I still expect that post-Covid there will be a resurgence in aerospace industries, and that long term Rolls-Royce continues to present a great opportunity for investors but buying all the way to its former buy limit would be a mistake at these levels.
Therefore I’m reducing the buy limit to 120 GBp, which means it’s still an active buy recommendation, but to a point where you’re not then starting to overpay for the stock should it begin to run higher in a post-Covid world.
Regards,
Sam Volkering
Editor, Frontier Tech Investor
