Times of crisis tend to make investors behave irrationally. At Sifter, we are prone to the same temptations and errors in thinking as other investors. Having lived through several crises, we have learned that the best thing to do when fear creeps in is to look at things rationally.
Sifter’s investment strategy has been implemented since the start of the 1990s and, in the form of a fund, since 2003. This is a significant length of time, so there have been a number of crises along the way.
The coronavirus pandemic took the world by surprise and the uncertainty tested the Sifter team’s nerves and made for long days at work.
In this article, I’ve put together eight key lessons that were once again put to the test during the spring. I’m sure many of you can relate to these experiences.
- You have to believe in your strategy
- Clear systems and procedures help you keep a cool head
- Maintain a balance between the details and the big picture
- Long-term performance is what matters
- Eliminate the cacophony from your mind
- The markets always overreact
- Don’t panic in a storm
- The ability of people and the economy to bounce back will always surprise you
1. You have to believe in your strategy
A strategy is only truly put to the test in difficult circumstances. When feelings of fear and uncertainty arise, it is important to keep your strategy in mind: what the promise is that we have made to ourselves and our investors.
It’s not advisable to change one’s investment strategy when the storm is at its fiercest. Doing so will make you lose your compass, your faith, and your returns.
2. Clear systems and procedures help you keep a cool head
A strategy must be underpinned by clear systems and procedures: when do we sell and buy, and why?
When you are rocked by a storm, having clear systems and procedures gives you important support and reduces mistakes. Systems and procedures create the culture that we believe in.
3. Getting caught up in the details can make it hard to see the big picture
It’s impossible to avoid delving into details in a time of crisis, but it’s important to keep sight of the big picture. During the COVID-19 crisis, for example, we took a deep dive into the cash management and debt situation of the companies we analyze. You need to find out when loans fall due and what kinds of credit limits a company has.
Conversely, predicting the monthly demand for these companies’ products and services would have been both impossible and pointless.
4. Keep your eyes on the horizon
When your investment horizon is more than five years, the most important thing is to evaluate how the company will make it through the storm and whether it will emerge from the crisis even stronger than before. Short-term events during a crisis are often given far too much attention. This increases the temptation to deviate from your strategy.
Long-term performance is what matters.
5. Eliminate the cacophony from your mind
In a time of crisis, the media goes wild and there are all kinds of headlines out there. The natural curiosity of analysts and investors drives them to collect as much information about the crisis as they can. In Sifter’s video meetings, the conversation often shifts to what the participants have read and heard and how they’ve interpreted it.
Information is a good servant but a bad master. The opinions published in financial media are often completely at odds with each other. If you’re not careful when you read and listen to them, your own decision-making is at risk of being overwhelmed by the crisis.
Staying mindful of your strategy, doing research and appreciating silence are good ways of coping with the cacophony.
6. The markets always overreact
The markets are like a group of teenagers. Overreacting is typical of them. So far, all of the crises the markets have ever seen have eventually passed. Often, investors look back on times of crisis and regret their decisions — including the things they didn’t do.
7. Don’t panic in a storm
When share prices plummet, the first thought most people have is to sell their shares and switch to cash.
The idea behind this does make sense: sell now and buy back later at a cheaper price.
The problem is that your timing has to be right twice: you have to sell at the right time and buy back at the right time. In our experience, this is rarely successful.
At Sifter, we tried to do this during the crisis of the early 2000s. We failed, as did many others. We won’t try that again.
8. The ability of people and the economy to bounce back will always surprise you
When the crisis is at its worst, those who are in the throes of despair will say that nothing will ever be the same. However, history shows that the market always bounces back — and not just to the previous levels, but something much better.
People and the economy have a built-in mechanism that drives them forward. While the process of reconstruction can sometimes be slow, we can rest assured that innovation, competition and greed will ultimately take the markets to new heights.
Investors often ask us “Is this a good time to invest?”
This happened again during the recent crisis. One of the most important principles is to be frank and tell people that you don’t know. No-one knows.
Nevertheless, you can point to history and show that making long-term investments in high-quality companies has been a superior way to accumulate wealth.
CEO, Sifter Capital Oy