The extreme sport of investing
If you ask a world-class cliff diver when the best time is to dive, the answer, Speedo1 in hand, is usually “right now!” If you probe a little more, you find out that these pros carefully observe tide patterns and wave action before they take the plunge. If the tide is out or the water is too calm, it’s a bad time to jump: divers need high tide to protect them from landing on rocks in shallow water and the turbulence created by the wave’s swell to soften their impact upon hitting the water.
By the same token, as tempting as it is to jump when there’s a gigantic wave pooling in the “landing area,” divers know that’s among the riskiest times to dive – the water will have calmed and gone out by the time they land their jump. Instead, cliff divers anticipate the waves: they launch off the top of the cliff when the wave is out and the jagged rocks are visible so that their landing coincides with the wave as it comes in. It takes nerves of steel.
Minus the Speedo, successful investing is a little like world-class cliff diving. In determining the best time to dive back into the market, successful investors aim to anticipate market cycles and invest when prices are low so that the investor has the benefit of the price rise when market conditions improve again (the tide rises and the wave swells). When there is little price differentiation between stocks (no wave action), investing can be unrewarding – like landing a dive on calm water.
Anticipating tide patterns and wave action in 2Q12
Following a period of very little differentiation between stocks last year, price differentiation returned in the first quarter of 2012. Those investors who were patient and disciplined about using the opportunity of the tide being out to invest at low prices were rewarded when many of the investments that were shunned last year (for example the Eurozone and Asian REITS) surged in the first quarter this year. In the end, the Russell 1000® Index was up 12.9 percent in the quarter. International and Emerging Markets had a strong showing, too, with the Russell Developed Large Cap Index and the Russell Emerging Markets Index up net 11.75 percent and 14.65 percent, respectively.
Of course, it’s always good to be on the lookout for big increases or declines – as Warren Buffett has said, “Be greedy when others are fearful and fearful when others are greedy.” Russell’s strategists, portfolio managers and economists still see opportunities for those skilled investors who are able to identify companies that have the potential to continue to grow their earnings even after these strong market gains. Historically, this type of environment has been the sweet spot for skilled active managers.
Bear in mind that risks to this scenario are still present. For instance, if news in the U.S., Europe or China is worse than expected in one or all three countries, stock markets would likely go down. But the flipside of such risk is the possibility of returns. Like cliff diving, investing is not for the faint of heart, but done with skill and discipline, it can be a very rewarding experience.
1 Speedo® is a registered trademark of Speedo International Limited, and is used in this presentation for illustrative purposes only.
The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, representative of the U.S. large capitalization securities market.
The Russell Developed Large Cap Index offers investors access to the large-cap segment of the developed equity universe representing approximately 70% of the global equity market. This index includes the largest securities in the Russell Developed Index.
The Russell Emerging Markets Index measures the performance of the investable securities in emerging countries globally.
Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.
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