Best to do nothing as others panic around you

Responding in panic to volatile markets is the worst bet on the table, especially when you can profit from those who make that mistake

PUBLISHED : Monday, 01 July, 2013, 12:00am
UPDATED : Monday, 01 July, 2013, 1:38am

In his autobiography So Far So Good (written when he was aged 94), Roy Neuberger of the eponymous asset management firm mentioned 10 principles of successful investing, including this gem: "Usually, when both short-term and long-term rates start rising, they tell the stock investor one story: Run for the hills."

It seems that investors have taken his suggestion to heart and are clearly running for the hills. But, and with all due respect to the master, there is also a case to be made for sitting tight.

Let's first look at what's been going on. Investors in recent weeks have been reacting to headline risks, which include a possible implosion of China's shadow banking system, the scope of which we can only gather through hints such as previous weeks' spikes in interbank lending rates.

Other current headline risks include rising sovereign debt levels in many developed countries and the continuation or tapering of quantitative easing and the implication for interest rates, inflation and the general economy.

As investors grapple with headline risks that can stretch for years or even decades, they risk taking action too soon or too late, or that is too little or too much.

Most investors feel compelled to take action even if no action would be best. While investors are taking action the smartest guys in the room (high-frequency traders, arbitrage traders, behavioural finance traders?) salivate in an environment where panic and fear rule the day because they can make a quick buck off investors who sell low and buy high as they gyrate back and forth between fear and greed, reacting to the daily headlines. And we only realise our mistakes in hindsight. The profits gleaned from active trading are a zero-sum game, and the public investor is not usually the winner in that undertaking.

Today's environment of volatile market conditions and rising headline risks is exactly the time when it's so important to stick to your plans in terms of allocation and investment strategy. It's not the time to follow the crowd into panic selling or faddish investment themes. In this latest sell-off as valuations get cheaper and you stick to an accumulation plan using, say, dollar-cost averaging, you could find yourself profiting from the current dislocation barring a system-wide meltdown that leaves all of us begging on the street.

So instead of running for the hills, I urge you to consider your portfolio and stick to your plan. In the rare case where you believe your portfolio is over-allocated to China or any other region, asset class or specific investment, it's certainly OK to cut risk. Otherwise, get your binoculars out, watch as everyone runs for the hills, and when you believe there are only a few people left in the game, go ahead and focus on your dollar-cost averaging to gain further exposure to an undervalued investment of your choosing. And hopefully you'll be that rare public investor who is enjoying a game of cards with the smartest guys in the room.