I looked up from my desk and found the market down more than 10%. The next day, it was up 10%. The day after, down 10% again. That violent yo-yo-ing was the reality this past spring. At one point, the S&P/TSX Composite Index lost a quarter of its value in about a week. Reflecting on 2020, the most memorable (or rather, forgettable?) part of the year was the market freefall during the spring. Amid the chaos, our team triple-checked every holding’s balance sheet and the discounts on offer and acted decisively. During such a stressful period, how were we comfortable that we were making good decisions?
One of the few certainties in investing is the ubiquitous presence of uncertainty. As an investment manager, it is our business to deal with uncertainties as well as the attendant opportunities and risks that uncertain situations present. At Sionna, we spend a lot of time thinking about the behavioural dynamics that can drive mispricing in the market and how uncertainty plays a role.
Following sharp declines in March, the stock market staged an impressive recovery during the second quarter of 2020. While we were a bit surprised by the speed with which this happened, we also understood that, historically, the largest market gains can be found immediately following sharp declines. March was ugly, but the selloff created many value investment opportunities for us, as selloffs usually do.
Throughout human history, irrational investors have fluctuated between fear (value) and greed (growth speculation). Behavioural psychology of finance demonstrates we are more frequently and strongly collectively moved by fear of loss. This type of emotion has not been present in our markets for a long time; however, we firmly believe it will return and will benefit patient value investors who are focused on the long term.
A situation currently exists that shares some similarities to the technology craze of the late 1990s to early 2000 period. During this time, everything but technology, telecom and media companies were labelled “old economy” and shunned by most investors as they chased the growth and promises of the new economy market darlings. Today, energy stocks feel like the “old economy” stocks of 20 years ago, many being left for dead with virtually no investor interest of any significance.
Some say value investing is both an art and a science. It is an art because successful investing requires judgement honed from experience, an understanding of history to recognize patterns and the emotional fortitude to shield against psychological biases. Investing is also a science because cold hard analytics can be applied. However, when investors focus too narrowly on any single metric, there is a temptation to rush to judge the attractiveness of a security or portfolio.