I received a market update from Foord Asset Management last week and I enjoyed this paragraph, in particular the portion in bold:
As time races on we find ourselves halfway through 2015 amidst extreme market volatility and lots of ‘noise’. I therefore believe that it is appropriate for me to reiterate the fact that at Foord we define risk as the permanent loss of capital. Market volatility presents great opportunity to buy good quality companies at a discount. We were anticipating the volatility that we are currently experiencing and have thus trimmed the equity allocation appropriately across the portfolios, and we have used market weakness to add select equity positions.
The South African equity market has experienced a loss these past few months and, even though we expected it, it still comes as a shock. It is not comfortable to see our investments down in value and I guess the immediate response is to sell our shares, rather than buy more shares. I often think of a quote I heard once: Don’t let your emotions ruin a good plan. So often investors buy when it is expensive and sell when it is cheap. So often they sell when the market is falling and buy when everyone else is buying. By selling their shares now they are making a loss as they bought them at a higher price and are likely only to rebuy them a few months or years down the line when the price is climbing.
I have often wondered why our relationship to other sales is so different—if our favourite sport or clothing store has a sale, we will pop in and buy what we need. Yet, when the stock market is falling and shares are technically on sale, we do the opposite—we sell and we get out. We do this not to make a loss but, by selling the shares, we end up making the very loss we tried to prevent.
This is not the time to sell your unit trusts or share portfolio, but rather to invest more. If you have additional funds you wish to invest, now is the time as local and offshore markets are currently relatively cheap. This is not the time to sell and get out, but rather to ride out the storm.