Global markets were pleased to hear Fed chairman, Jerome Powell, said last night that 'the Fed can be patient' when it comes to raising interest rates. The immediate impact on markets is for equities to move higher and for the US Dollar to weaken.
Talking of central banks, our MPC meets next week to decide what will happen to interest rates in South Africa. You will remember that at the last meeting it was decided to increase interest rates in anticipation of hikes in the developed world, particularly from the US Fed. The comments from Powell last night, highlights that our SARB was probably a bit premature in raising rates. The silver lining though is that we probably won't see another rate hike locally for the foreseeable future.
Our 10c Worth
An interesting new research paper suggests that professional investors typically underperform their benchmarks because they buy stocks well, but sell them very badly.
The team of economists and decision scientists lead by Klakow Akepanidtaworn from the University of Chicago Booth School of Business, studied a group of institutional investors with portfolios averaging $573 million and found that they exhibit costly, systematic biases. The key line in the abstract: "while investors display clear skill in buying, their selling decisions underperform substantially - even relative to strategies involving no skill such as randomly selling existing positions".
In other words, they usually devote weeks of painstaking research into to what to buy, carefully checking fundamental indicators. They read analyst reports and might even talk to company management. They also try to ignore past share price performance, in the hunt for bargains.
However, when raising cash from portfolios, or trying to look like they are doing something useful, or making space for a new holding, they tend to victimise stocks which have done very well or very poorly. They use shallow, technical reasons like "trimming winners", "cutting dead wood" or "kicking out losers". These academics found that the fund managers would have done better by selling stocks at random, or not at all.
Another problem is selling directly after companies report their quarterly results. The researchers found that even these well paid hotshots made hasty decisions on scant information. As they say? act in haste and repent at leisure.
The implication here is clear. Accumulate quality. Never panic. Avoid stock sales. Ignore the noise. Be patient. Over time, we (you) will do better than the herd.
Our market is off to a green start this Friday morning. There are a number of key data releases today, the first is a GDP figure from the UK and then this afternoon there is US CPI. Next week, things kick into high gear when US companies start reporting their quarterly results. Good luck to the Proteas this weekend, things are going to be festive at the Wanderers!
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