Crises, Fear and Greed

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  • Value Insights

1.) Exceptional circumstances: Systematically against fear

In principle, value investing aims to exploit exaggerations and misjudgments of the market. One of their causes is that investors extrapolate positive as well as negative news too far into the future. The ongoing corona crisis show us again that it is often about controlling human emotions. As humans, we are hard wired to react emotionally to certain extreme events, making it difficult for us to keep cool in volatile markets and suppress our short-term, reflex-like reactions despite underlying uncertainties. For our brains, a stock market crash is comparable to any other real life threat and it kicks off our fight-or-flight instincts. This is one of the reasons we chose and continue to stand by our systematic and disciplined investment approach. We want to avoid irrational decisions, make fact-based investments and always keep in mind a long-term investment horizon.

The short-term, reflex-like reaction of the market to jump into defensive sectors is understandable at first sight – as these stocks are most protected against economic downturns. Nevertheless, this opinion arises without consideration for the already elevated valuation level of these sectors. Cyclical stocks on the other hand are sold at any price, implicitly assuming that these companies will never recover. The market reacts extremely quickly and seems to have identified the winners and losers of this crisis in no time. In our view, however, this is only one part of the story. According to Ben Graham’s quote “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” the market should put the fundamental assessment of individual companies back into the foreground in the long term. In this process, the short term "vote" will at least partially correct itself.

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Goran Vasiljevic

Managing Director (CEO, CIO)

 

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