Slowly, slowly catchee monkey

In the days of British colonialism, many far eastern countries were under British rule. While British soldiers were stationed there for prolonged periods of time, they would try to catch monkeys to keep as pets.

Now I have never tried to catch a monkey – or any other wild animal for that matter – but I would imagine that doing so is a daunting task, as our protagonists soon found out. One can’t simply charge into the jungle and flush them out; monkeys can run faster than humans, they can climb and they can hide. So despite all their best efforts, the soldiers were not very successful!

The locals, however, had long mastered this task by employing a simple yet effective method: they would place a basket containing fruit in a clearing in the jungle where the monkeys lived. The basket would be tied to the ground, and would have a narrow opening that would only just allow a monkey hand to fit inside.

Soon enough the monkeys would come along and stick their hands through the ‘monkey hand holes’ to get to the juicy fruit inside. But the opening was not big enough to allow both the fruit and a full monkey fist through. And so the monkeys got stuck. Worse still, they were so greedy that even when the soldiers approached to capture them, the monkeys would not release the fruit and so were easily caught.

Naturally this took patience on the part of the captor, who would have to wait quietly until the monkey had ensnared itself. This slow, strategic and measured approach proved to be more effective. Hence the phrase, ‘Slowly, slowly catchee monkey!’

And how true this is for your investments.

We are in the midst of a period of heightened volatility and economic uncertainty, an environment exacerbated by the fickle nature of human beings. The post-financial crisis world appears to be a little less robust than previously thought, with governments, businesses and consumers all feeling the proverbial pinch.

But selling our positions and just sitting on cash won’t help the situation either; now more than ever, we need patience. I have long heard it said, ‘Nothing undermines your financial judgement quite like the sight of your neighbour getting rich. But then again, nothing undermines your financial judgment quite like the sight of your neighbour getting poor!’

Our role as advisors to, and managers of, your investments is to more accurately predict and anticipate market movements, and assume positions that will capitalise on likely opportunities or avoid threats.

To this end, a thorough understanding of market cycles and their stages (first postulated by Hyman Minsky a few decades ago) provides some valuable clues:

1. The first stage of a market cycle is that of displacement. A displacement occurs when investors get enamoured with something new – either a new technology or historically low interest rates, the likes of which precipitated the US housing market bubble in 2007. This displacement attracts buyers into the market seeking to capitalise on this shift.
2. Boom – the next stage usually starts off slowly following the displacement, but then gains momentum as more and more participants enter the market, setting the stage for the boom phase. The sight of your neighbour getting rich prompts fears of missing out on what could be ‘once in a lifetime’ opportunities!
3. Euphoria – during this phase, caution is thrown out the door and asset prices skyrocket. Valuations are ignored and the fundamentals point to vastly unsustainable prices. Yet these valuations continue to be ignored and even justified regardless of the extent to which these levels defy logic!
4. Profit-taking – by this stage the smart money starts to get out, heeding the warning signs and selling their positions. However the exact timing of when to get out eludes most investors.
5. And finally panic – in this stage, asset prices reverse and retreat as fast as they climbed. Investors who invested on leverage are willing to unwind their positions at any cost, and take the market down with them.

While it is nearly impossible to call the bottom of the market, the latter part of last year followed by the early part of this year have pointed to many stage 5 clues. It is in this stage of the cycle that your patience and resolve are tested the most. Especially when the world and the country appear to be coming apart at the seams.

Yet, much like our British colonists who suffered failure when rushing in and trying to catch a monkey with a foolhardy strategy, this part of the cycle is not about chasing the quick gains and aiming for fast returns (aka taking on too much risk). Resolve, sticking to the value proposition of your portfolio, maintaining your tolerance for managed risk, and being patient are the tools that will see you through this period, and further your path towards success and the achievement of your long-term financial goals.