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Patience is a virtue, especially during market dips

Sep 12 2018 14:27
Schalk Louw

We often hear people say someone is “a big fish in a small pond”, or “a small fish in a big pond”. 

I experienced the literal version of this saying in my own fish pond at home. I bought a few Koi and placed them in my tiny fish pond. 

Soon, however, they grew quite large (and by large I mean roughly 4cm to 5cm in length) in relation to the size of the pond, but there was one that was slightly larger than the others (about 6cm in length) and he swam around like he owned that pond. 

After a while, I decided to make the pond bigger, and to also buy a few larger Koi while I was at it. 

The new Koi were, on average, about three times larger than the others. 

Suddenly, the 6cm Koi wasn’t Mr Big Shot anymore and he seemed to have a tough time adjusting to the new, larger pond. 

Long story short, the 6cm former big shot eventually got his groove back and caught up to the others in terms of size, strength and self-confidence. 

My message for this issue, however, has nothing to do with who wins or loses, but rather to point out the impacts of one-dimensional thinking. 

We are quick to view South Africa in isolation and to believe that all the problems and mistakes we are currently facing originated internally. 

In doing this, we are no different to the 6cm Koi who had no idea that there was a much bigger world out there. 

I recently read a very interesting article by Ben Carlson titled Buying Emerging Markets during a Disaster in which he focused on the MSCI Emerging Market Index, priced in US dollars. 

More specifically, he focused on what happened after periods during which this index fell from its peaks by 20% and 30% respectively. 

In summary, he discovered the following: each time the index declined by 20% or more over the last 20 years (since September 1998), the average return in the following year was 25.66% in dollar terms, an average of 59.27% higher after three years, and an average of 93.17% higher after five years. 

Over the last 20 years, this index has declined by 20% or more a total of nine times. 

But what does this data have to do with SA? A lot more than you think! Yes, I agree that as at 15 August, we were trading 6.5% lower than the market’s peak at the end of January 2018, and 6.9% lower since November 2017. 

But to only focus on this is to be behaving exactly like a big fish in a very small pond.

When we take a look at the FTSE/JSE All Share Index (JSE) in dollar terms, we note that the JSE has declined by 23.83% between January and 15 August this year. 

Those who are still anxiously waiting for a correction to occur in our local market have most probably already missed it. 

By applying the same principles to the JSE that Carlson did to the MSCI Emerging Market Index, it becomes clear that the JSE declined by 20% or more in dollar terms a total of eight times over the last 20 years. 

The good news for those who currently find themselves in a rut due to the poor market performance over the last four years is that the average return in the year following a 20% decline in the JSE in dollar terms was 5.53% over the last 20 years, 45.49% in the following three years and 121% in the following five years. 

I do, however, really need to stress at this point that historical figures offer absolutely no guarantees for future performance. 

To conclude, I would like to quote Mark Housel (Getting Rich vs. Staying Rich): “Nothing great or terrible is likely to stay that way for long, because the same forces that cause things to be great or terrible also plant the seeds to push them the other way.” 

The reality is that South Africa is a small fish in a huge pond, and although we may feel that we alone are to blame for the recent poor market growth, that isn’t entirely true. 

History has taught us that we just need to be patient.   

Schalk Louw is a portfolio manager at PSG Wealth.

This article originally appeared in the 13 September edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

investments  |  market  |  jse
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