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Printed: 05 December 2022 12:19 PM


09 Mar 2022 - The question is, when should you invest?
By: Insync Fund Managers

The question is, when should you invest?

Insync Fund Managers

February 2022

Why we don't try to predict macro-market changes.

We don't need to, no investor does. It is well established that the total returns of a stock follow the earnings growth of a business in the long term. 

Companies that can sustainably grow their earnings at a high rate over the long term are called compounders. Investing in a portfolio of compounders is one of the best ways to generate wealth for longer-term oriented investors that beat market averages. A major benefit of compounders is that market timing is rarely an issue, hence risk is also reduced.

Our industry spends an inordinate amount of time trying to predict or forecast the future of markets. Sophisticated soothsaying by in-large. The probability of getting this right on a consistent basis is very low. Many espouse otherwise but a check of their historical records on predictions are quite revealing. 

Consider this:

  • $10,000 invested in the S&P 500 Index in 2000 was worth over $42,000 by December 2020. A healthy return of circa 7.5% pa. 
  • 70% of this return came from just 10 days. Miss those 10 and your funds grew to only $19,300. For those managers in the 'predictions game' this is what is at stake.
  • Miss the best 20 days and your account balance fell lower to $11,500. That's less than 5% of the potential return of remaining fully invested. 

What about the worst 20? It is also valid that avoiding the worst 20 days would have boosted your return beyond the fully invested 7.5% annualised return.

The best and worst return periods show that extreme events have a large bearing on investor returns. Based on volatility around extreme events (and their mostly unpredictable appearances), it is impossible to predict the worst and best days. 

Indexing cannot filter in/out the extremes. If only those sophisticated 'crystal balls' in the hands of commentators and fund managers actually worked! Insync's "active" basket of 28 compounder stocks, carefully constructed to control the risk, delivers outperformance over passive benchmarks, over both full and multiple investment cycles, and does so without having to predict extreme events.

Fastest decline in history. The Covid-19 pandemic clearly demonstrates the folly of an approach based on prediction. It created the fastest stock market decline in history catching out investors who believed prediction works. Let's say however, you were right and got out in time. Next and without warning, the fastest recovery in history then occurred. Unless you were in the market you missed out in a big way.

Predictions require constant and correct timing decisions. Stay in or out? If out, when? Then to where? And for how long? Thus, multiple questions need to be answered just for each event. Now, repeat over the life of your investment hundreds of times. No person or organisation has successfully got these answers sustainably right to produce great enduring outcomes.

Market timing strategies also cannot benefit from the compounders. This is because timing tends to interrupt the powerful process of the conversion of earnings into price appreciation. Insync's focus on investing in compounders means we don't need to concern ourselves with the low hit-rate strategy of market timing stocks we hold. This is just one way we lower risk to our investors yet retain above average returns over time that endure.

Examples of compounders
IDEXX and Adobe have been in the Insync portfolio for a number of years. Typical to our holdings they deliver sustainable compound earnings growth. Selling these two stocks in anticipation of, or during, the crisis would have resulted in us missing the substantial upside in their earnings growth and the ensuing stock returns they produced since the Covid induced market lows.

Funds operated by this manager:

Insync Global Capital Aware FundInsync Global Quality Equity Fund

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