How falling markets present tough questions to investors

Thursday, Oct 25 2018 by
44
How falling markets present tough questions to investors

Share prices have fallen across the board in October, and it’s a reminder of just how quickly fear spreads when stocks start tumbling. My colleague Jack wrote this week about the sense of foreboding that’s hanging in the air at the moment. There’s almost a sense of inevitability that some kind of correction is past due. Knowing how to react to that kind of prospect is difficult.

Ten years into a bull run, and faced with various signs of trouble (in various parts of the world), it’s not hard to piece together a pretty gloomy narrative. While October has been unpleasant, some of the main UK indices - certainly the small and mid-caps - have been trending down since early summer. So for some investors, this experience has been less of a suckerpunch correction and more of a protracted beating.

This week the FTSE 250 has been flirting with correction territory, with the index currently down by just over nine percent for the month. As usual, the UK indices are taking at least some of their cues from price action in the United States. That’s been translating into some sharp and unpredictable intraday moves - days that start well but end up finishing on yet another low.

Profit warnings and bad news

In recent weeks the sharpest falls on the FTSE 250 have been exacerbated by bad news and profit warnings. Among the biggest fallers have been stocks like Keller, ConvaTec, Superdry, Indivior, Inchcape and Victrex. In terms of relative price strength, they’ve all undershot the All-Share index by more than 20 percent.

There are similar war stories over on the AIM All-Share, where Fevertree Drinks - a stock that, size-wise, has more in common with the FTSE 100, has seen more than a billion pounds wiped off its value since the end of the summer. It’s down from £4.23bn in early September to £3.18bn currently.

But it isn’t necessarily all bad news. It’s fair to say that some stocks (a minority) are holding up reasonably well under the conditions. But it’s also the case that investors with at least half an eye on value have been crying out for a meaningful correction for several years. For many, what we’ve seen so far won’t be anywhere near enough. As a result, we’ve…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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73 Comments on this Article show/hide all

donald pond 25th Oct '18 1 of 73
14

"But trading in and out of the market and missing out on the index’s best 30 days would have left you with just £6,878."
I cannot express enough how much I hate this quote, which the asset management industry trot out time and time again. Clearly nobody could be invested for all but the 30 best days. If they use that statistic they could just as well use its corollary, which is if you were invested for all but the 30 worst days. A more meaningless statistic it would be hard to find.
More useful is the evidence taken from brokerage accounts of how most traders underperform the market: recently I say the (perhaps apocryphal) story that accounts of the dead outperform those of the living, simply through a lack of tinkering.

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HumourMe 25th Oct '18 2 of 73
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In reply to post #412049

"But trading in and out of the market and missing out on the index’s best 30 days would have left you with just £6,878."

I also hate the quote as it isn't balanced by the opposite, returns if missing out the worst 30 days.

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Ben Hobson 25th Oct '18 3 of 73
2

In reply to post #412049

​I do agree. It's daft (and even the fund manager quoted in the report sounded mildly embarrassed that they'd even gone there). But that said, I think the general point stands.

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UK Value Investor 25th Oct '18 4 of 73
5

I think the key point is to remember that share prices are just someone else's opinion of what a company is worth. And since most people aren't forced buyers or sellers, it's an opinion you are usually free to ignore.

Blog: UK Value Investor
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timarr 25th Oct '18 5 of 73
5

In reply to post #412049

I say the (perhaps apocryphal) story that accounts of the dead outperform those of the living, simply through a lack of tinkering

It's apocryphal: no one has ever been able to find the evidence that backs this, lovely though that would be.

The real question is to what extent the best and worst days are clustered.  I seem to remember reading somewhere that both are clustered together and usually (and unsurprisingly) occur during periods of market volatility. And markets are usually most volatile when falling.

I had a quick look at the list of largest gains on the S&P500 and eyeballing the data 8 out of the 20 largest rises happened in 2008/9, 4 in 2010/11 and most of the rest around 2000/01: i.e. during bear markets. Most of the largest falls happened in the same periods.

That's not evidence, btw, it's just an anecdote.

I'm not a great believer in market timing, but I'm pretty sure if you can avoid bear markets you will make more money. And mostly the very best days occur during bear markets. Go figure.

timarr

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dfs12 26th Oct '18 6 of 73
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In reply to post #412199

Some evidence that the dead tend to outperform can be seen within Stockopedia. Just look at the fantasy fund league table. It amazes me how many of the top performers are people who set up their funds 3 years ago (or more) and then forgot about them. People will say we've been in a massive bull market... but the active fund managers have been in the same market and have commonly not done so well. Not proof but an indication it may well be true. Might be worth Stockopedia using their data to create some proof of their own! i.e. correlation of returns to activity within fantasy funds.

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m096146 26th Oct '18 7 of 73
2

Surely this debate is all about timing a re-entry point. Even if you don't read the bottom and re-enter something near to it then you must be better off than staying in as long as trading costs are covered.
A simple example is selling your £100 holding before the share drops 50% but then recovers to its original value. The holder gains nothing. If the seller went back in with his £100 when the share had dropped 25% then when the share returned to its original price you make 33% gain. What's wrong with that?

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andrea34l 26th Oct '18 8 of 73
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In reply to post #412134

Out of Ben's investor emotions I suppose I fall into the "prepared to sit it out" camps. I also fall into my own "depressed by consistently falling share prices" emotion... I feel a complete idiot that I didn't see this coming and sell out of some of my holdings - I may feel that many of my holdings are good companies, but to see so much wiped off the share price gives me an amount of sadness. I have been investing for quite a long time... and I never seem to learn :-( I do however have about 20% cash in my unit trust account waiting to plough some of it back into the market, which has been sitting there for some time waiting for a correction.

Ben, you say "there’s almost a sense of inevitability that some kind of correction is past due", but considering the markets have given up their entire gains of this year then isn't this a correction in itself?

Anyway, UKValueInvestor, your sentence I think the key point is to remember that share prices are just someone else's opinion of what a company is worth rather struck a cord with me. The blatant blanket sell off that we are witnessing at the moment seems to illustrate this, I have several companies in my portfolio that have issued very positive trading statements, including earnings beats, and this just makes no sense to me when this news is disregarded in the market sentiment driven sell off.

As far as I can see, when the US market falls then the UK market falls, and when the US market rebounds then the UK market falls less - Brexit uncertainty is obviously a factor here.

BTW, does anyone know why Victrex (LON:VCT) is falling so heavily please? Out of the shares in your list Ben, I cannot see any negative news out for this company at all... and alas I hold. They don't seem obviously overvalued... to me.

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FREng 26th Oct '18 9 of 73

In reply to post #412199

In the dotcom era I noticed (and benefitted from) small cap shares following major movements in the FTSE 100 but with a day or two lag. I wonder if that will be the case again.

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herbie47 26th Oct '18 10 of 73
1

In reply to post #412199

Actually Fidelity did a study and found it's best performing client accounts were either dead or accounts had been forgotten.

Also "A University of California study of 66,000 investors found that the higher a portfolio's turnover, the lower the average return. Those who traded the most lagged the overall market's performance by 6.5%. As the researchers put it, ‘trading is hazardous to your wealth'."

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herbie47 26th Oct '18 11 of 73
1

Timing the market can be difficult, just look at Brexit, some people sold, stop losses were hit but within a short time the market had recovered and since then has performed very well. Some investors don't try to time the market such as Warren Buffett and Terry Smith, others such as momentum traders do.

Re Victrex (LON:VCT), I think the sector across Europe has fallen, there have been reports that the chemical industry could be one of the hardest hit by Brexit.

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timarr 26th Oct '18 12 of 73
5

In reply to post #412314

Hi herbie

Actually Fidelity did a study and found it's best performing client accounts were either dead or accounts had been forgotten.

Fidelity says there was no such study.

The original story comes from a transcript of a podcast between Barry Ritholtz and James O'Shaughnessey. But no one can find the podcast.

It's an Internet myth which continues to circulate because no one ever checks their sources.

timarr

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Howard Marx 26th Oct '18 13 of 73
5

In reply to post #412199

Counintuitively, bull markets rarely feature large up days. 

As timarr suggests, history reveals that the best (& worst) daily returns occur in bear markets, at times of elevated volatility:

5bd2e2fcda0c0volatility_clusters.jpg


https://awealthofcommonsense.c...

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Howard Marx 26th Oct '18 14 of 73
5

In reply to post #412334

The podcast is still available on Ritholtz's Big Picture site. The quote arrives after 58minutes, 50seconds:

O'Shaughnessy: "Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was..."

Ritholtz: "They were dead."

O'Shaughnessy: "...No, that's close though! They were the accounts of people who forgot they had an account at Fidelity."


https://ritholtz.com/2014/09/m...

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timarr 26th Oct '18 15 of 73

In reply to post #412389

Fair enough ... though, Fidelity still say there was no such study :)

timarr

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timarr 26th Oct '18 16 of 73
2

In reply to post #412344

Counintuitively, bull markets rarely feature large up days. As timarr suggests, history reveals that the best (& worst) daily returns occur in bear markets, at times of elevated volatility.

Yeah, the whole thing about needing to capture the best 25 days in the market to get most of the returns is another myth because you'll probably have to trade through a bear market and lose money overall to capture them. If you can you're better off sitting it out and waiting until calmer times return.

Of course, if we could figure out when bear markets started and finished then it would make that a whole lot simpler ... although if you're looking at large up and down days as a measure then 2018 has seen two of the largest ever point rises and five of the largest ever point falls on the S&P 500. Those are points changes though, most of the really large percentage changes happened in the 1930's, with the largest ever fall on Black Friday in 1987.

timarr

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