Informed decisions for volatile markets
David Ross, CFA, International Fund Manager
The structural performance of Echiquier World Equity Growth over the last 10 years is also explained by the strict adherence to its investment philosophy which results in the construction of a conviction portfolio of 20 to 25 stocks, including the top 10 weights which make up around 60% of the fund. The upside potential of each company in the portfolio is estimated by the management team over a 3-year horizon.
Sound decision-making is the cornerstone of successful long-term investing. However, when in the midst of an unprecedented crisis, bordering on panic, sound decision-making is often in short supply. That is why I always rely upon my rules, built up over 30 years, in order to maintain sound decision-making.
At top of mind currently is Rule #11: Economic Forecasts are Useless for Equity Investors. Daily, I hear or read some pundit proclaiming to the world that the equity markets are disconnected from the economy. They keep telling us that at a time of record unemployment and unprecedented declines in GDP, it is unfathomable that equity markets are approaching their previous record high levels. Markets therefore must go down, they reason. “They” are wrong. Real investors have known for a long time that you cannot use the economy to predict markets. No, the correct view is to use markets to predict the economy. In fact, the US Government tracks ten different indicators in order to provide a better economic forecast (it is called the Index of Leading Economic Indicators). One of those ten items is the stock market, as measured by the S&P 500 index. Those who use the economy to try to predict the stock market have it completely backwards.
Back when I started in this business thirty years ago, no one even paid attention to economic forecasts. Most Wall Street firms did not provide economic research. Nobody cared. Then the bond market became more important, and consequently interest rates became more important, so fixed income departments started publishing economic reports. Eventually, these reports would get passed around to the equity fund managers. Eventually, these became part of the normal reading materials for equity managers. I still don’t know why. I have never found anything of any investment value from reading an economic report. This is still true today. And it is why I continue to follow my rules instead of some “conventional wisdom”. By maintaining a highly concentrated portfolio, I focus on my best ideas and thus become better informed about the risks and potential return on each investment. Personally, I estimate the ideal number of securities in the portfolio at about 30, because I cannot perfectly analyze 50 or 100 files.
Last tip to resist in these volatile markets, from my golden rule # 1: great stories are rarely cheap, cheap stocks are rarely excellent.
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