“Sell in May and go away!” This adage would have worked well for you this year.

The Cambridge English Dictionary defines the meaning of Capitulation as either of the following 1. “to accept defeat, or to give up or give in”; 2. “to accept military defeat”; 3. “to accept something or agree to do something unwillingly”.

In investment terminology capitulation is an appropriate term used to describe that point when the average investor finally gives in and sells, this is usually indicative of the bottom of a stock market cycle and therefore the worst time to sell, however when you reach this point you just don’t care anymore.  Much like a battle-weary soldier suffering unbearable conditions you chose what may appear to be the only option by surrendering just before the reinforcements arrive.

South African investors can certainly be forgiven for wanting to waive the white flag, after breaking through 60 000 points early May the JSE ALSI closed just above 54 000 pts last week, not much higher than the 50 000-point level of 5 years ago.

One of my most enthusiastic investors epitomised capitulation when he told me that he was simply not interested anymore.  Smart enough to know not to sell, but completely disinterested in the market and not planning on investing any more money irrespective of the apparent mouth-watering opportunities on offer. This is quite understandable and maybe it is because he is too smart.  Let me explain.

Warren Buffett is quoted as saying that you don’t need to be overly smart to be a great investor, you just need to have good temperament and the ability to think independently, which I assume he means is to ignore the market noise of fear and greed.  Emotional intelligence (EQ) over IQ.

The IQ investor will analyse the implications of a trade war, Brexit and escalating geo-political risks and the effect thereof on global growth whilst also trying to call the US interest rate cycle and possible next recession, this will probably end up in analysis paralysis and what might seem like a sensible decision to wait before investing.

The EQ investor will accept that predicting the outcome of Brexit and / or the trade war is a 50/50 bet and even if one could guess right, the resultant effect on markets remains an unknown. What is known, is that short-term market prices never truly reflect the value of the underlying business, understanding this and taking a longer-term view, the EQ investor is able to exploit the emotional rollercoaster of the investment cycle by selling shares when market is overly optimistic and buying shares when the market is overly pessimistic, looking through the noise.

It is usually not as bad as everyone thinks and conversely never as a good as everyone thinks and therein lies the opportunity for the emotionally intelligent investor.

 

Mark Williams
Mcomm, CFP®, HdipTax
T. 021-851 3746
Email. service@synfin.co.za

 

 

Capitulation
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