Staying the Course Versus Timing the Market

Key Takeaways

• As the saying goes, time in the market is generally superior to timing the market. Yet, investors tend to have a bad habit of buying winners too late and selling poor investments too soon.
• Staying the course does not necessarily mean sitting still. It means avoiding bad behaviour, remembering your goal and ensuring your approach is applied with discipline.

From trade wars to Brexit, and now the dramatic implications of coronavirus, we’ve had plenty to deal with. So, what do we mean by “staying the course”? It’s not always about sitting still, but rather, to focus on the goal that you set in the first place and ensure your behaviours align with it. 

Behavioural Errors Can Wreak Havoc on Long-Term Portfolio Returns

Let’s face it, investors too often redirect their attention from the destination to the journey. That is, people are hard-wired to be procyclical, chasing the winners and selling out of the less flashy investments because of a drive to make money work harder for us. This is not just conceptual, it’s practical – we can see evidence in the fund flow numbers.

Therefore, it’s vital that as investors we adopt a well-reasoned and principled framework for investing. But it’s easy to have principles when it’s smooth sailing – those placid conditions are not when principles are most valuable.

A Step-by-Step Guide to Staying the Course

The best thing an investor can do when contemplating change is to reflect on their goals.

Ask yourself this: “Given where I am now, what actions move me closer to my long-term goals?” “Would an investment change align with the original investment plan for reaching well-defined goals?” These are different questions than, “What do I wish I had done last month”? No doubt losses are painful. But acting rashly to them can make things worse in the long run.

So, the key question to ask is whether anything has fundamentally changed since setting the original strategy or whether it’s just that you are disappointed with your progress toward your goals.

If something has fundamentally changed, the question to ask is whether you can identify what has changed. Write it down, then balance this by writing what it might mean if you’re wrong. This should include any misjudgment risk as well as the added costs if you decided to change investments (given where you are now). You may often find that the impulsive change you desire is not necessarily going to increase the probability of reaching your goals.

If it has “just” disappointed you, but nothing has fundamentally changed, the likely best option is to stay the course. By thinking probabilistically and remembering that investment markets never move in straight lines, you may avoid the perils of trying to time the market. Further, you may benefit by doing the opposite to your intuition (given the evidence against it) and teach yourself to be a contrarian. Simply put, when bad things happen in the market, they have already happened to your portfolio, and that’s in the past. A contrarian views this volatility as an opportunity to find overlooked value in the market and invest in solid companies being sold cheaply by others who are in the grips of fear and undue pessimism.

How We Think About Staying the Course

As professional, multi-asset investors, we focus on investment objectives, always bearing in mind the opportunity costs and risks. We also write down a balanced thesis that ensures we control the emotions that can drive some decision-making. Our investing principles don’t sway when the market lurches.

In this sense, staying the course is not idle or passive, but rather about staying aware and thinking in long timescales. Some investors may look at a recent period of returns and, with hindsight bias and the herd mentality at play, will fear for the future. Many will further justify to themselves that reward for risk is simply not sufficient and will consider a change in strategy. This thinking is usually well-intentioned, but it may be dangerous and must be thought through with a long-term perspective.

Staying the Course vs. Timing the Market

“Staying the course”, in our way of thinking, is subtly different to even “time in the market.” Time in the market sounds passive. Yet, if volatility were to spur a portfolio rebalancing, this keeps the goal in place and aligns with a long-term approach. This is what we would call staying the course.

Perhaps returning this phrase to its nautical origin[1] will help illuminate what we mean. Imagine you’re the captain of a ship and are sailing towards your destination. If after a few hours you’re tired of holding the helm steady, this is akin to making portfolio changes for emotional reasons. If instead you find yourself blown off course, it would be foolish to not change your heading to align your destination. We believe our valuation-driven investment approach does the latter. We seek the strongest winds and/or lightest chop, always keeping firmly focused on our destination, knowing the weather changes.

Align Every Change to Your Goal

It’s important to reiterate that investors shouldn’t avoid change altogether; however, must be far more calculating when they do make a change. Seth Klarman paints a thoughtful picture of the approach:

While some might mistakenly consider value investing a mechanical tool for identifying bargains, it is actually a comprehensive investment philosophy that emphasises the need to perform in-depth fundamental analysis, pursue long-term investment results, limit risk, and resist crowd psychology.[2]

Bringing this together, we believe that “staying the course” is the right approach, patiently allocating to assets that will help you achieve your goal. So, if you catch yourself getting down about the state of the equity market or trying to predict what’s next, keep in mind these concepts and always remember why you’re investing in the first place. Since its original publication, this piece may have been edited to reflect the regulatory requirements of regions outside of the country it was originally published in.

[1] For what it’s worth, the original meaning of “stay the course” was probably different from our current meaning, which may be better said as “staying on course.”

[2] Source: The preface of the sixth edition of Security Analysis by Benjamin Graham, 2008

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Meet the Japanese tech heavyweights you’ve never heard of

The best investment opportunities are often the hardest ones to find. We analyse and consider the full length of a company’s value chain as this can reveal unique investment opportunities.

We are attracted to companies that perform a role that cannot be easily dislodged or replicated, such as the production of a component that’s crucial to a whole product. One example of this type of investment can be found in the Japanese tech industry value chain, specifically with companies such as Shin-Etsu Chemical Company and Tokyo Ohka Kogyo (TOK).

We’re fundamental, valuation-driven investors who focus on quality companies and invest for the long-term. We look under the hood. We take time to understand what drives performance to identify those companies with a sustainable advantage, as we believe quality companies tend to reward investors over the longer term.  Our analysis also assesses the ‘fair value’ of an investment, which allows us to buy at the most compelling value and sell when we believe there’s little upside left.

Shin-Etsu and TOK could be described as niche firms, specialising in obscure materials that have become essential to the tech industry. Both are genuinely ubiquitous in growing industries, manufacturing semiconductor silicon (Shin-Etsu) and photoresists (TOK). Apple uses their wares in iPhones, Dell in their laptops, Samsung in their full range. Both have strong fundamentals that stand up to our rigorous analysis, where we look for consistent future earnings. By grounding our decisions in an investment’s fair value, we’re positioning our investments towards greater potential for returns.

Though its name recognition is limited, Shin-Etsu is the world’s largest silicon producer, with a lasting presence that’s witnessed other silicon players wither on the vine. Founded as a fertiliser company in the 1920s, it has an enviable moat that aligns nicely with our long-term (and sometimes quiet) approach. While it’s a company that sits within the chemical sector it plays an important role as a supplier to the technology industry.

TOK started it’s operations in 1936 as a research lab, before being reorganised as a joint-stock company in 1940. Along with rubber company JSR, TOK is one half of what’s effectively a duopoly in consumer electronic components. Its exacting standards have been vital to its longevity. 

As part of MSTR, Shin-Etsu and TOK, we have confidence of the long term earnings potential of these two companies and monitor all our stocks regularly for any changes to their underlying fundamentals.

© Morningstar Investment Management Australia Ltd (ABN 54 071 808 501, AFS Licence No. 228986). Morningstar is the Responsible Entity and issuer of Morningstar International Shares Active ETF (Managed Fund) (MSTR). The information provided is for general use only. Morningstar warns that (a) Morningstar has not considered any individual person’s objectives, financial situation or particular needs, and (b) individuals should seek advice and consider whether the advice is appropriate in light of their goals, objectives and current situation. Refer to our Financial Services Guide (FSG) for more information at https://morningstarinvestments.com.au/fsg. You should consider the advice in light of these matters and the Product Disclosure Statement  before making any decision to invest. Past performance is not a reliable indicator of future performance.

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