«If there’s one thing I’ve learnt over the years, it’s that you shouldn’t go against the market«That is the blunt remark made a few days ago by a senior executive at a national bank to one of our clients. In fact, it is a phrase we have heard on many other occasions from various bank employees, and even from some savers, over the nearly three decades that we have been investing our money and that of our clients.
The question we are going to try to settle once and for all is whether it is true that, in the long run, we must stand up to Mr Market, or whether, on the contrary, we should let our investments ride out the ups and downs of the markets. And the answer may come as a surprise to more than a few: It depends on whether we are bankers or investors. Let us explain.
When a banker or a second-rate advisor recommends an investment that subsequently falls in price and causes losses in their clients’ portfolios, they usually advise them to sell that holding and replace it with another that has performed better, for example another investment fund or a different share in any listed company. Investors may well ask: why on earth do they recommend selling the fund/share that has fallen (and is therefore cheaper) to buy the fund/share that has risen (and is therefore more expensive)? Well, the reasons bankers have for making such sudden U-turns are varied, and we’ll list the main ones: Firstly, the lack of knowledge regarding the quality and true value of the assets it recommends holding in the portfolio, whether these are shares in companies purchased directly or through investment funds. In the case of funds, investors are also often completely unaware of their managers, investment philosophy, criteria, methodology, etc. At best, they will be familiar with the brief explanations provided by the fact sheets or the marketing materials they periodically make available to the general public, and little else (and I mean at best…). It is therefore logical that, faced with such a lack of knowledge regarding the quality and real value of the assets they recommend, they flee in terror as soon as results go awry and jeopardise the future of their long-suffering clients held captive by them. Because they have nothing to go on to continue recommending those investments other than recent results. And if these are poor, they change tack and base their new recommendations on those funds or companies that have risen recently, meaning they look better in the picture of recent performance. What else can an adviser—who, let us remember, is unaware of the real value of the assets they recommend—do but be guided by the recent price movements at which the market trades them? In reality, as soon as short-term results fail to materialise, the ground vanishes from under the feet of bankers or pseudo-advisors, because they have no basis to justify why they recommended one particular investment over another.
There are also other reasons why a banker or so-called ‘adviser’ often recommends selling assets that have recently fallen in value and investing in those that have risen. For example, the fact that for most of their clients (let’s not kid ourselves, unfortunately they are far from being able to be described as investors), it will be much more acceptable to sell the losing positions in their portfolios and buy others that have recently risen. «Out with the bad, in with the good!«, as that charlatan psychic from the early-morning trash TV shows would say. Because for any ordinary person who has no idea how to invest their money, it is perfectly acceptable and even reassuring that their banker (yes, the very same one who has caused them to lose money) recommends selling the positions that have fallen and buying others that have risen. That is avoiding going against the Market and the Client, who, let us remember, does not know how to invest and therefore allows themselves to be «advised by a specialist»—in other words, the easiest route for the banker. This is where ‘Advisory Services’ with a capital ‘A’ should exert its influence on clients and prevent the easy, impulsive and irrational reaction of selling when prices fall and buying when they rise. But beware! Only if advisers are truly capable of systematically recommending high-quality investments; otherwise, the sooner we jump ship, the better.
Even if you invest in the best and cheapest assets in the world, we know that it is difficult for an adviser to convince their clients that the assets in their portfolio, which have fallen in price recently, are of high quality – and let us remember that, to do so, the adviser must first possess the necessary knowledge and make the effort to learn how to assess their quality and value. But their duty should be to try to convince their clients, through well-founded explanations, that the more these high-quality assets fall in price, the more attractive it becomes to invest in them. In other words, far from selling, one should hold the position or even buy more units of that fund (or shares) which have fallen in price and are now trading at a level that is still irrationally lower than their real value. Instead, the easy option for a banker or pseudo-advisor is to tell the client what they want to hear: that is, we get rid of what has gone wrong in the last quarter, and we hold on to or invest in what has recently performed well. There’s no need to argue with the client; there’s no need to waste time or energy trying to explain or make a case that, despite the recent fall, the quality of the assets in the portfolio is excellent, and that selling would be madness.
Another easy route taken by bankers or so-called ‘advisors’ is to focus exclusively on funds and shares from well-known companies or fund managers with impressive-sounding names, provided they feature in their sales catalogue, which, incidentally, only includes those funds that generate the highest commissions for the marketing entity (the bank), regardless of whether or not they are well managed. It matters not at all that their long-term results are mediocre and that their management is inconsistent.
There are also other, less significant reasons why bankers and pseudo-advisers refrain from advising clients to go against Mr Market, such as the tendency to follow the lead of rival bankers or pseudo-advisers. None of these «professionals» likes to run the risk of being left out in the cold when the tide goes out and their clients suffer losses. By recommending going with the market in unison with the vast majority of bankers, when Mr Market sweeps in, no one will point the finger at them, as most of their competitors« portfolios will be suffering the same consequences. And clients will never be able to blame them for losing far more than the rest of their friends and acquaintances, nor will they accuse them of holding a somewhat »exotic’ losing position in their portfolio that the rest of their circle does not have. Because all clients receiving pseudo-advice from the bank will lose in similar proportions and on similar products, and therefore no banker will be singled out for criticism by their long-suffering clients. All the misfortunes of the pseudo-advisors will be covered by a standard of mediocrity (Here are some links to various articles Part 1, Part 2 y figures) whose interest lies not at all in the success of their clients’ investments, but rather telling their clients what they want to hear, avoiding the need to understand the quality and value of the assets they recommend (thus allowing them to focus exclusively on the sales side of things), covering their backs against Mr Market’s downturns with the old saying «misery loves company», and thus keep clients captive for as long as possible.
In contrast, the true investor’s approach should be precisely the opposite. The priority is to understand the quality and value of each of the assets in which we invest, and to capitalise on the inefficiencies, follies and excesses that Mr Market constantly commits in order to make money. And if we have a fund in our portfolio managed by an excellent fund manager, who selects companies with sound and undervalued businesses for his portfolio, but whose share price is driven down by the erratic market, we need a proper financial adviser who will tell us not to sell that fund but to hold on to it or even overweight it to take advantage of that opportunity. Because, whilst I’m at it, I’d like to recommend this useful, simple and affordable little book, «Every fool confuses value with price«.
We must remember that the vast fortunes amassed by the world’s finest investors over the last 100 years were built by applying this principle: going against the market. Mindlessly going with the flow, without knowing the real value of the assets in which one is investing, only benefits the interests of bankers and pseudo-advisors, but not investors or sound advice. Therefore, depending on one’s individual priorities, we will arrive at one answer or another to the general question of whether or not we should go against Mr Market. And you, whose side are you on?