“Trust the compass!”

View from a mountaintop

“Trust the compass!”. These words echo down the years, shared by various kind and helpful military instructors, when explaining how to navigate when you couldn’t see where you were going. It might be night-time, or fog on some Welsh mountain, but the advice stood. Don’t try to guess where you are or navigate by instinct, instead trust the compass and, of course, the map. Better sailors than me say the same is true of navigating a boat in a storm with high waves. Trust in facts and science rather than gut instinct. And these are wise words to apply to financial markets at times of stress, which is clearly where we are now.

Part of the stress of where we are now is that this crisis comes with a physical risk that is typically not present in financial crises, outside of war. There were many things about which to worry during the global financial crisis of 2008, but the risk of becoming seriously ill was not one of them. In many ways, the comings and goings of financial markets are rightly second order matters compared to the health of one’s family and friends, and, indeed, the health of strangers. But the first order risk to health and life makes the second order goings on in financial markets even more opaque, clouded and hard to see through.

If you guess at what to do, you run the risk of making one, or indeed both, of the cardinal mistakes of investing at times of stress. One is to go too early and to buy on the dips, generating the famed, but morbid, dead cat bounce. If the valuation of yesterday was a good valuation and today the stock is cheaper, why not buy it? In normal times, this might work. But in abnormal times, it can be expensive and demoralising. You buy into what looks like cheapness, the market picks up a bit but then it falls again and you sell the stock. The last to buy are often the last to capitulate.

If the valuation of yesterday was a good valuation and today the stock is cheaper, why not buy it? In normal times, this might work. But in abnormal times, it can be expensive and demoralising.

The other cardinal sin is to go too late: to be so traumatised by the fall in values, and the pro-cyclical cacophony of doom that accompanies it, that you wait until markets have recovered before buying back in. Sitting in cash is a good wealth preservation strategy but generally a poor wealth creation strategy. The double whammy is to go too early, lose confidence, sell at a lower price and then sit on the sidelines.

Crises, of course, come and go much more regularly than we like to think. The last big one, the Eurozone crisis, was less than a decade ago. But the story is the same. When things go wrong, we become much less confident in valuing assets. Because in valuation, much as in life, we tend to do today what we did yesterday and will do tomorrow what we did today. You value a stock by looking at yesterday’s price, then reflecting on whether you think it is worth a bit more or a bit less, and marking it up or down by a small margin.

When the pillar of yesterday’s price is swept away by market turmoil, however, you are forced to reflect on what an asset is truly worth, its fundamental valuation. This is tough going and demands confidence in your own analysis. It is also hard to start doing this in the heat of battle. It is better to have had this on your agenda throughout the preceding cycle so you know where you believe value truly lies. You will then be able to buy – or not buy – with confidence regardless of what others are doing.

What you choose to buy, which assets you want to own, should follow your long-term goals. One of the less helpful mantras we hear a lot at times like these is to stick to your long-term asset allocation. This is often heard when you have gone into a crisis with a large exposure to risk assets, which have fallen in value, and your advisers are encouraging you not to sell. Given the circumstances you are then in, it is not, in itself, bad advice. It probably is by then better to hold than to sell. But the better advice would, some time ago, have been not to load up on risky assets and chase yield when valuations were departing from fundamentals. To use another analogy from the Welsh mountains, just because the way ahead is downhill does not mean you should run down it.

There is still a great deal we don’t know about this novel coronavirus and, until we know more, we cannot confidently predict to what shape the global economy will need afterwards to adapt. But there will be an afterwards and our role in allocating capital will be part of this adaptation. Knowing what are your long term investment goals and knowing what are the fundamental values of assets are your compass and your map in the fog of an economic and financial crisis that arises out of a health and welfare crisis.

View from a desktop

“Family offices are all unique in their heritage and cheese”. So read the transcript that I received having used an app to automatically transcribe the discussion in our new weekly webcast. I believe what was actually said was “in their heritage and in what they are trying to achieve”, but perhaps we can blame the diction.

That webcast, broadcast live to clients and our network from the comfort of our own homes, transcribed by an app, digitally recorded and distributed by email, is a seemingly simple exercise that functions thanks to the (mostly) seamless use of a great deal of technology.

None of it is new, the technology that we are relying on in order to communicate and operate as normal has been around for years, but it is only now that it has become so central to the way that we work. Other than the occasional blip – no human transcriber would think that family offices are mostly differentiated by their preferences for cheese – it has been surprisingly easy to switch into this new way of working. My current desktop view has only really changed in two ways; firstly, that it is now in my living room, and secondly that it is quite often populated by the faces of my colleagues, clients and contacts.

This tells us something about our innate flexibility. Times like these call for a strong sense of direction, for trusting the compass, but also for being adaptable enough to deal with varying terrain along the way. Long-term investors know this well. It takes a certain type of person to open up their computer, see markets moving at an extraordinary pace – flying, as it were (the word volatility comes from the Latin, “volare” to fly) - and to be unshaken by what is unfolding.

When multiple asset classes fall at the same time investors are faced with a harsh reminder that there is no fixed way to preserve wealth; no one asset class that protects capital in all environments.

Our own team have demonstrated exactly such nerve over the last quarter, as well as a good deal of prescience. While no-one could have predicted that a virus would be the catalyst; we had been preparing client portfolios for significant volatility for several months in the lead up to this crisis. This left us with a solid footing on what has and continues to be, very difficult and rapidly changing terrain. When multiple asset classes fall at the same time investors are faced with a harsh reminder that there is no fixed way to preserve wealth; no one asset class that protects capital in all environments. It is principles that protect and grow capital over the long run; being adaptable enough to think outside of the box, but resolute enough in your long-term strategy to hold your nerve when markets move rapidly.

In other words; trust the compass, and be nimble when the grounds shifts under your feet.

Snapshot for the quarter

31% of all internet traffic is tied to malicious activity: bots, automated hacking tools, spamming and spyware.

Capital Generation Partners LLP is authorised and regulated by the Financial Conduct Authority and registered as an Investment Adviser with the SEC. This publication does not constitute investment advice and does not constitute an offer to sell or a solicitation of an offer to purchase any security or any other investment or product. The document is not intended to be a financial promotion and is intended for professional clients only. This publication has been provided to you solely for your information and may not be copied, reproduced, further distributed to any other person or published, in whole or in part for any purpose. Any other person receiving this document should not rely upon its content. Opinions expressed in this publication, whether in general or specific, represent only the views of the authors at the time of preparation.