Principles for dealing with a crisis
Geoff shares the principles he has learnt from navigating multiple investment market meltdowns over his four-decade career. In the current environment, “hope is not a strategy”.
Geoff Wilson You’ve got to accept that things have changed and the quicker you accept that and the quicker you can recalibrate what the new world will look like, the better you’ll do as an investor. Personally, it’s got me significant up the technology curve, working out how to work from home. I’ve got Skype Business, I’ve got Zoom, I’ve got House Party. One of the things that you always have to do is work against your emotions. And that’s the hard part. Matt, Catriona and Oscar, and the whole investment team have done an exceptional job. One thing I’m pleased about is how quickly they’re able to adjust, adjust to the new economic environment and adjust the portfolios.
James Marlay Wilson Asset Management put the question to the shareholders. What’s your view? Where are we on the curve of investor emotions? How are people feeling?
Geoff Wilson It has been a roller coaster ride and we’ve been everywhere I think in the last little period. At the moment, I think it probably is hope which doesn’t fill me with confidence. In terms of how I like to invest, I like to plan for the worst and hope for the best. The tough thing is ‘hope’ is not a strategy, but that’s where I think we are.
James Marlay The first time I saw you speak on a panel session, you brought out the ‘buy when there’s blood’ quote. It was one of my early memories of how you like to invest. You had to be quick to see the blood this time around, do you think maybe there hasn’t been enough pain felt just yet?
Geoff Wilson That’s right. To me, it’s one of the great quotes, Baron Rothschild said, “Buy when blood is running in the streets, even if it’s your own.” When the market falls and it falls significantly, then some of the blood is your own. It was very extreme, the fall. 35 odd percent in the quickest period of time ever, which wasn’t overly surprising because we’ve just had the longest bull market ever. Therefore, it wouldn’t surprise you if the bear market is significantly different than what we’ve seen previously. In terms of the quickest bear market ever, and that’s the surprising part. To me, you’d probably expect the longest bull market ever to be followed with a longish bear market. When there’s liquidity pumped into the system, as we’ve seen globally and what the Fed (Federal Reserve) has done, then it’s really hard to fight that liquidity.
James Marlay We’ve had to adapt to a new way of working and a new way of living, not just working, with social distancing. What’s been a positive from the changes that you’ve come across?
Geoff Wilson Well, the positive is, there isn’t the travelling to work and spending time with the family. It’s really a forced period of time. To me, learning other skills where I wasn’t an online person and I’ve had no choice but to become an online person, in terms of various methods of communicating with the team, but also consuming. It’s learning different skills, moving people online in terms of consuming, it’s been a phenomenal boost for that. People are saying it’s taken us forward five years. It wouldn’t surprise me if it’s nearly a decade. I might’ve never gone online. I’m in my early 60’s, say I last another 25 years or so, then I might’ve continued to do it just by jumping in the car and driving up the street.
James Marlay What’s been a challenge?
Geoff Wilson I think the challenge is differentiating work from home. One of the great things about being in the office is you’ve got community and communication. It’s a very efficient way of communicating. One of the things I enjoy is collecting information and in the investment game, it’s really the best quality of information tends to win. How I tend to collect information is by communicating. It would be running into someone in the lift or down the road or around the city and collecting information that way. You lose that. So you’ve got to find different ways of communicating from that perspective.
The difficult part is really the Skype or the Zoom calls, when you have eight or nine a day, to me it is exhausting. It is so much different to sitting face to face and communicating. It’s a lot more intense. You’re more focused on the individual. So, some of those things have been tough.
James Marlay On a recent call, one of your shareholders asked if you’d been buying shares in the listed investment companies (LICs)? One of the reasons you gave was that you felt like it was probably a bit early still. That was a couple of weeks ago now. How have your views evolved on whether it’s a good time to be stepping into the market and how you and the team are thinking about that?
Geoff Wilson In the latter part of February, when it was clear that the virus was going global – I think it was the Monday 24th of February – as a group, we thought it was clear that it was a ‘risk off’ moment and the world was going to change. As an investment team we had to work out how we should position our portfolios for that change. I’ve got to take my hat off to Matt, Catriona and Oscar and all the investment team. They did a fantastic job.
We were communicating consistently around that period and continue to. We were trying to add little bits of information to work out what the new world would look like. Obviously in those early days, it wasn’t as clear and as time has gone on, it’s become clearer in terms of the economic impact.
The portfolios over that latter part of February and early March, were changed significantly to reposition those portfolios. We’re trying to buy undervalued growth companies and buy them when we go see a catalyst that’s going to change the valuation. Well obviously, the growth outlooks were all changing and it was really the ability to forecast or to estimate what the new growth outlooks would be. You’re setting up your portfolios.
In terms of the market, the market has bounced back because of the phenomenal liquidity that’s being pumped into the system. Whether it’s the monetary authorities or fiscal stimulus, that’s what’s brought it back up so quickly.
In terms of the underlying economies, it’s the big debate. Which letter of the alphabet is this? Is it going to be a V-shaped recovery? A U-shape, a W, an L? I think the market’s sort of guessing on a U-shaped recovery. To me, that’s really the question. I’m not 100% sure it will be a U-shaped recovery. I think this is going to take a lot longer. And we’ve seen the liquidity being pumped into the system its sort of brought valuations, brought the whole market back up again. I’m still very conservative in terms of my positioning. What I’ve learned over time, whether it’s the ‘87 crash or the GFC is, you’re better off erring on the side of caution.
I might’ve been slightly bearish when we first met and I still would like to plan for the worst and hope for the best. We’ve still got a lot of unknowns that will become clear over the next two, three and six months. Would you be buying with your ears pinned back now? To me, you’ve got to have enough cash so you sleep well at night because the market always does provide opportunities.
James Marlay Geoff I’ve spoken at length with the portfolio managers about what they’ve been doing in the individual portfolios. You’ve got one advantage over them in that you’ve been around through a few more crashes back to ‘87, as you alluded to. What are some of the lessons that you keep front of mind, particularly when you go through a period like this, that you can share with the team and things that have stuck with you that you think are really important to remember when you’re investing through periods of market dislocation?
Geoff Wilson You definitely have to be focused. One of the things you’ve got to do is you’ve got to work against your emotions. You’ve got to accept that it’s always different. The ‘87 crash was the market falling 10%, and then on one day falling significantly. You’ve got to play what’s in front of you in terms of the market, because every market dislocation is different. That’s on the negative side. On the positive side, every bull market climbs a wall of worry. We’re always nervous on the way up in the bull market. One of the good things about bear markets is they’re a lot shorter than bull markets. What we do know as an investor, is that equity markets over time deliver you exceptional returns.
The interesting thing about this bear market that we’ve just had, to me, the difference personally was normally when the market’s falling, I get really excited. I wake up in the middle of the night, I’m watching CNN. Like yourself, I’m getting excited because I know there’s going to be an exceptional buying opportunity at some point in time. This time, because the reason for the market falling wasn’t a financial reason, it was a human reason, people were dying, it was really a very weird feeling. I think everyone has been touched by the incredible pain that hundreds of thousands of families are feeling because of their loved ones dying. So to me, it was a weird period.
For probably for the first month or month and a half, I felt a little bit off balance. The last two or three weeks, where we’ve gone to the level of more acceptance, and it looks so from an Australian perspective that we’ve done an extremely good job, I’m just a bit more relaxed. The tough thing is, every bear market is different. The factors that bring them on, no one sees them. It’s always unexpected. You never pick the top of the market and you never pick the bottom. It is just understanding that the market does perform over time. You work against your emotions. When you are scared, that’s when you want to be buying. When you’re relaxed, that’s when you want to be selling.
James Marlay Geoff, on the last investor call you talked about the fact that coming out of a bear market is a great opportunity for active managers to add some value. Can you talk me through a bit more detail about how you think about adding and capturing that value coming out of a bear market?
Geoff Wilson Every investor gets negatively impacted on a bear market. The sign of a really good investor is how quickly they make that money back. During the GFC, ourselves like everyone else was negatively impacted with the fall in the market. I think it took us a little over two years to make our money back. And I think the market took six plus years. So it’s really how quickly you can make that money back. It’s having the flexibility to move your portfolio around. As soon as it was clear that there were real cracks occurring in the market, that’s when the Lead Portfolio Managers all readjusted their portfolios for what they were expecting would be a new environment, a new operating environment.
It’s how you take the opportunities as the market rallies. In the first couple of weeks, we were putting together the list of stocks that we wanted to own in the next bull market and really looking for those opportunities. We knew from history that you’re going to have companies that are going to have to raise equity during these periods. Back in the GFC, about 12% of the market cap was raised in new equity and we’re seeing it again now. With Matt, with WAM Leaders (ASX: WLE), he’s got a lot of flexibility and liquidity in his portfolio, so he could reposition his portfolio as he wanted holding a low cash level. Catriona had a lot of liquidity in her portfolio with WAM Global (ASX: WGB) and could do the same. Oscar and the team with the mids and the smalls, they moved their cash levels up over 40%. That was to reposition the portfolio so that when equity was being raised, they could take advantage of that. All the equity that has been raised has been raised at a 10% plus discount.
James Marlay Finally, what’s your assessment of what’s happening in the LIC space at the minute?
Geoff Wilson Before the market fell, the larger LICs were trading on average around NTA. It tended to be in the mid and smaller LIC’s were at the discount. Obviously, with the market falling, then you’d assume there is negative sentiment from investors. You assume their discount would increase and you’d assume at some point in time when the sentiment changes, then the discount will reduce again. I love the opportunity of buying a dollar of assets for 80 cents. Hey, I’d love to buy a dollar of assets for 50 cents. So if you can take a medium-term view, you know those discounts will dissipate over time.