Hannes Kulvik, Sifter Capital

The stock markets go round and round like a carousel – it’s never the right time to invest

For many investors, the stock markets are like a carousel. Sometimes they wait for it to slow down so they can jump on. When it eventually slows down, they are worried it will come to a complete halt. Ultimately, they end up just standing by and watching. This natural psychological phenomenon tends to keep us from taking action. What we need is a different mindset.

The past three years have held some unusual moments for many investors. Personally, I’ve become even more convinced that timing the market is impossible. That is why Sifter’s strategy is to keep owning shares in high-quality companies regardless of market fluctuations.

2018 – “Share prices can’t go any higher”

In 2018, many investors and media outlets strongly believed that the stock market carousel had reached its highest speed and prices could not go any higher. They sought to justify this view by suggesting that the stock markets had been rising for too long, the global economy was slowing down and there were tensions between the United States, North Korea and China.

Performance of the Sifter Fund (Sifter Fund Global R) 1–12/2018
Performance of the Sifter Fund (Sifter Fund Global R) 1–12/2018

Many investors expected a market correction that would create the opportunity to invest more. Indeed, there was a long-awaited slight dip in the market near the end of the year. The Sifter Fund also declined by 12% between the beginning of October and the end of December. Many investors decided to wait and see whether the decline would continue once it had begun.

It didn’t.

2019 – Growth continues after all

The year 2019 began surprisingly with strong growth. The value of the Sifter Fund grew by 24% during the spring (January 1–April 30, 2019). Those who had decided to wait on the sidelines were disappointed. They now thought the upward move had been too sharp. Consequently, their only logical move was to wait for the next downward correction.

Performance of the Sifter Fund (Sifter Fund Global R) 1–12/2019
Performance of the Sifter Fund (Sifter Fund Global R) 1–12/2019

The spring and summer of 2019 did bring a brief, month-long dip of 7% (May 1–June 4). However, this was not enough of a decline for those who were waiting for a larger correction – after all, prices had already been lower in 2018.

Again, waiting was not rewarded. The stock markets then went on an upward trajectory toward the end of 2019, with 16% growth (June 5–December 31, 2019).

“Share prices must come down after rising so sharply,” the papers said.

Quality Investing generated an annual return of +31.3% to the Sifter Fund in 2019.

2020 – The COVID-19 pandemic takes the world by surprise

The year 2020 started with the same trend of moderate growth. The Fed had already started to raise interest rates, which slowed down the rise of prices in the US stock market to some extent. Some of the investors who had waited for a downward correction for a long time decided to finally invest at least part of their available funds. There didn’t seem to be many alternatives and the global economy kept moving forward, albeit at a slower pace.

In late January, news began to come out of China about a threatening virus, but the Western world initially believed that the new virus was only a problem for China to contend with.

On the weekend of February 15–16, Italy awoke to COVID-19. Investors responded to the news of the spread of the outbreak and the uncertainty it caused by panic selling. Sifter’s value fell by 31% (February 17–March 24). By comparison, the S&P 500 declined by 34% and the Eurostock 50 index by 38%.

Performance of the Sifter Fund (Sifter Fund Global R) January 1–October 28, 2020
Performance of the Sifter Fund (Sifter Fund Global R) January 1–October 28, 2020

The stock markets had finally returned to the levels seen in September 2017. More than two years of growth evaporated in a month. Unfortunately, the potentially lucrative dip also came with a significant increase in uncertainty about the future. There was talk of the worst recession ever seen, bankruptcies and, of course, the illness itself.

For investors who want to time the market, this would have been the right moment to take action. The carousel nearly came to a standstill, but only for a moment. The price rally that followed in the subsequent months took almost everyone by surprise. Sifter’s value increased by 35% (March 27–May 30) practically over a period of two months, returning to the level seen at the beginning of the year.

Still, many people thought the fall and rise had been too sharp. It would be better to wait for the markets to decline again. It’s never the right time to invest.

A summary of the past three years – has it paid off to invest in shares, and what to do going forward?

The past three years have been an exceptionally volatile period in the stock markets. The only thing that’s certain is that uncertainty will continue.

  • Over the past three years, the value of the Sifter Fund has increased by 36% (January 1, 2018–October 30, 2020, R Class).
  • This period includes multiple dips of more than 10% and the sharper decline of more than 30% seen in March 2020.
  • We don’t know what direction the markets will move in the future.
  • The only thing that we do know is that the stock markets will continue to go up and down.

Buy, watch, and replace – the Sifter DNA

I present an alternative approach that sounds rather simple.

  1. Buy carefully selected high-quality companies with a strong earnings model.
  2. Watch the company’s ability to make money and sustain a competitive advantage.
  3. Replace the company when you find a better one or when the company’s earnings model is permanently diminished.

For many people, such a calm and systematic approach to investment is a strange idea. Indeed, it’s not a question of investing, it’s a question of owning.

Even if the stock markets are going up and down, why would you sell your holdings in high-quality companies?

It is more important to be a long-term investor in high-quality companies than to time your selling and buying according to the fluctuations in the markets.

For many of us, our experiences over the past three years have been all too real. Of course, investment is something that brings up strong emotions in many people but, at the end of the day, most people want to make money and avoid looking at price movements on a day-to-day basis. 

You should put your hard-earned wealth to work for you instead of having it sit idle.

Hannes Kulvik
Founder of the Sifter Fund

Disclaimer. The contents of this page do not constitute investment advice or purchase recommendations for stocks. This page describes our opinions on the companies we have invested in or whose shares we have sold. The past performance of the fund is not a guarantee of future results.
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