DIY Investment

Sometimes it’s best to do nothing
July 18, 2013

The more time I spend thinking and reading about investment—as well as actually investing, of course—the less sure I become about most aspects of it. Events this year have only reinforced that feeling.

I entered 2013 with a fair amount of cash at the ready for opportunities, should they arise. Equity markets promptly rocketed, heralding an uncomfortable period during which I couldn’t see any huge improvement in the fundamental performance of most companies that would explain why their share prices were rising so strongly. The only option was to sit on one’s hands, painful though that can be.

Subsequently things went into reverse and all sorts of markets fell sharply or simply gyrated rather sickeningly. At least some of the things that had been going up much too far and too fast were now getting cheaper again. But the queasy feeling persisted—it was impossible to escape the sense that I was being offered the chance to take part in a game of which I didn’t know enough of the rules, while powerful players pulled strings behind the scenes. Wiser heads will doubtless point out that this is inevitable in a market driven by the ebb and flow of gossip and opinion about what this or that central bank will do next, rather than by the real performance of companies or industries.

It’s very hard for professionals engaged in investing other people’s money to do nothing for long periods of time. They get paid to do things and are judged every quarter, so they have an inevitable bias towards action. For those who put their own money at risk, on the other hand, different rules apply. Markets this year have been a dangerous place for investors trying to take sensible decisions based on fundamentals, and doing nothing has been, for me at least, the less uncomfortable option.

Doing nothing, however, cuts both ways and not only has it meant refusing to buy, it’s also meant neglecting to sell things even though their prices have gone up far faster than seems rational. Looking back over the year so far, I feel I’ve learned the most from my decisions not to sell, rather than my overwhelming unease at the thought of buying.

When I try to justify my inaction, several factors come into play. First, I tend to look at what the current dividend represents as a yield, not based on today’s share price but on the price I paid for my shares. In almost every case, the dividend has risen since I bought, so the yield I’m receiving based on my purchase price has also gone up, which provides some short-term comfort.

But that’s not much help on its own unless the argument for owning the shares—an acceptable mix of solidity and long-term growth potential—remains intact. In two areas where I have invested, I’m comfortable that this is the case. The first is in domestic (as opposed to offshore) outsourcing, where the provider runs operations on behalf of other companies or public authorities. This is a long-established trend that I expect to grow in the UK and elsewhere.

The second area is non-bank sources of credit for companies and individuals. Among all the uncertainty, there are a few things I see as axiomatic, one of them being that as banks shrink their activities others will expand to fill the gaps they leave behind. This is happening, and companies that stand to benefit from that trend will continue to have a place in my portfolio—unlike banks, which I suspect still have a few unpleasant surprises up their sleeves for the optimists among us.

It’s difficult to time the market when stocks are overvalued; to know when to sell and when to buy back in once the price has fallen. If there are long-term reasons for owning shares in these sectors, I feel these outweigh short-term arguments for selling—hopefully there will be greater profits to come in the future.