Nightmare on Wall Street

The bland commercialisation of Hallowe’en isn’t the only thing David Coombs is dreading: October is typically a terrible month for share markets. Still, our head of multi-asset investments has an instrument creepier than Freddy Krueger to keep the kids and market slumps at bay.

Tracey, my partner, was asking me, “Heroes or Celebrations?”

I feigned interest in that subtle way only men can, “Uh, Heroes.”

“Shall we get both?”

“Er, yeah, both.”

At this stage, I lift my head away from the paper. Why? What have I got myself into? Then I relaxed somewhat: ahhh, they are only chocolates. But then I panicked again: it’s Hallowe’en, they must be for the children playing in our road (I know in this age of Game of Thrones, Call of Duty and Generation Z this conjures up a quaint Victorian image). They will no doubt be trick or treating. The doorbell will be running red hot all night …

Now, I hate Hallowe’en and all its commercialisation. It was certainly not a thing in the Welsh village where I grew up. It’s a weird American thing and now it’s over here. Children that do not leave their bedrooms (where their XBoxs and PlayStations live) for 364 days of the year go out terrorising fund managers on October 31st, blackmailing them for sweets at the soft end of a Nerf gun.

I could be celebrating this Hallowe’en, however. If it passes without another October market meltdown. Octobers have a bad history for stock markets and the investment talking heads have been laying it on so thick it may just spook everyone into another correction. I have watched with amazement how the media have been trying to draw parallels with the market crash of ’87 just because we had a storm then and it was October as well. Total nonsense of course.

Still, chief financial officers have been in a particularly ghoulish mood lately as they release their companies’ quarterly earnings. I hate quarterly earnings season, as it represents all that is bad with modern investment trends: short termism. The price reactions to near misses or beats on guidance are ridiculous in most circumstances. This also used to be an American thing. The focus on such short-term results must distract some management teams and influence decision making. Does it hinder risk taking?

Currently, volatility is masked at the index level, with implied volatility on the S&P 500 and the FTSE 100 hovering near record lows. But it can be very significant at the individual stock and portfolio level. This requires iron-clad discipline from portfolio managers, as the noise is often deafening.

My approach to this nonsense is to add significantly to any of my companies that gets hit by poor short-term results, so long as nothing has changed to the investment thesis. This is the case in almost all instances. Hold is not an option for me. That is putting off a decision – wait and see, if you like. Many people do this because they want more certainty. Unfortunately, when you get that certainty so does everyone else and the opportunity has been missed.

Is adding in these situations more risky? Absolutely. Will some of these additions be mistakes? Possibly. But I have to have trust in my process and conviction in my companies – their management teams in particular. Challenge them; don’t fall in love with them; follow the sell discipline, certainly; but stick to the long-term view that led me to buy these businesses in the first place.

The companies that beat short-term earnings guidance do tend to get a share price boost, but the scale of gains tends to be less than the falls experienced by those that miss. Fear still seems to outweigh greed it would seem!

As for Hallowe’en night, I have a long-term plan in mind for it too: the kiddies will get some Miniature Heroes and a lecture on targeting a high Sharpe ratio. They won’t darken my door next year!


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