Why investors should never try to time the market or themes

This fund manager reveals her biggest regret in investing and how the average punter can avoid the trap.

A man closesly watch a clock, indicating a delay or timing issue on an ASX share price movement

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Ask A Fund Manager

The Motley Fool chats with fund managers so that you can get an insight into how the professionals think. In this edition, Alphinity Investment Management client portfolio manager Alfreda Jonker tells why trying to time the market is fraught with danger.

Looking back

The Motley Fool: Is there a move that you regret from the past? For example, a missed opportunity or buying a stock at the wrong timing or price.

Elfreda Jonker: Over the last year or two with COVID, it’s obviously been a very volatile period and a lot of style switches. And for us at Alphinity, our process is sort of our religion, in that we combine fundamental and quantitative research. We look at this all the time and look at the signals: Where are the earnings upgrades? What is the quality? What is the value of the company? I think, over the last 2 years, a lot of us have started to focus on which of the stocks are the COVID beneficiaries — who will lose and who will win, and when will the reopening happen? 

As a result, we get a stock like Qantas Airways Limited (ASX: QAN) in our portfolio. Even though we reduced it slightly, it’s actually started to see big earnings downgrades.

With all the [COVID] shutdowns and all these false starts, we held out to say, “Okay, we think it’ll get back to that earnings upgrade cycle now”. Then it’s, “Okay, not happening now. Then next year”. 

The regret for us is rather than trying to be cute about timing the cycle — timing particular themes like a COVID reopening — just stick to your process. Just go back to process and, especially through volatile times, just focus on that and say, that is what we always do. 

We’ve been managing our funds like that for 11 years now. Don’t try and play these themes and cycles because, if we did, we probably would’ve traded that particular stock better. 

But of course, you always look at this in hindsight. And I think a lot of people make mistakes over their years, but it’s definitely a lesson that we’ve learned over the last year is… when things get volatile and there are so many different themes driving the market, don’t try and play with those.

Rather, go back to basics and focus on the fundamentals and the earnings, and let that guide you as far as when and how to invest in a company. 

There’s a lot of COVID beneficiaries and reopening stocks that you can put in that same bucket, from a global perspective as well. So that, I would say, is probably our regret. We probably should not try [to] call timing on when to invest in reopening companies.

MF: Fair enough. Regardless of whether you’re an amateur or professional, no one has a crystal ball, do they?

EJ: Exactly. 

Well, on the other hand, it did open up opportunities like Sydney Airport (ASX: SYD), which we didn’t own, but that the valuations obviously pulled back so much that it opened up for opportunity to be bought out. So there was some good that came out of this as well. 

But yeah, nobody’s [got] a crystal ball and I guess that’s why we don’t try and make really big overarching trades on themes or trends or macro calls. 

We rather just focus on that fundamental — bottom-up — finding the leadership opportunities. That’s a better approach for us over the long term if we want to get that consistent return we want to offer.

Motley Fool contributor Tony Yoo owns Sydney Airport Holdings Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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