It’s enough to make you buy an ETF!

Henry Jennings | Marcus Today 

We have just finished reporting season, and some of the moves on results have been extraordinary. You get the feeling that there are two issues: analysts have been woeful in forecasting (‘guessing’), and companies have been equally woeful in not softening up the market for disappointment. What is also really interesting is that when you read the numbers and the outlook, it is fairly obvious what has been going on. Yet many—including myself—missed the signs.

That reminds me of an old joke about a road sweeper who was inclined to steal road signs. As it goes, when he came home from work, the signs were all there!

Some of the moves really have been huge. Just in the last few days, JLG fell over 33% on its underwhelming results and outlook. APX was poleaxed over a number of days, and on Thursday, IEL was whacked 11% on what was, again, an unsurprising result. It is not as if student placement and testing is a boom industry in the US, the UK, and Australia, after all. We can all see that—except the market, apparently.

I don’t call results ‘The Killing Season’ for no reason. What has also been puzzling is the bounce-back in some stocks only the day after. It appears that the trading bots are searching for easy targets and then moving on. Sometimes, you feel that once the stop losses are triggered, they are just sitting there, waiting. RPL fell hard on its numbers. I even wrote in the Newsletter how the crown had slipped, only to see it rally back a similar amount the following day.

For some investors, volatility equals opportunity. For many, though, it is stomach-churning and brings a nausea that only cash can soothe.

There are alternatives to this sinking feeling when your portfolio gets hit. You could just sell the entire portfolio before reporting season, but that does have implications for your tax bill. You could try going through your holdings with a fine-tooth comb to see if there is something you have missed—some director selling, an already declining share price as traders sense weakness. You could even take a look at the short positions, which at least give you a guide to the ‘hit list.’ The shorts think they know something and will punish failure. Equally, we see short-covering rallies that punish the shorters—but then they return, like the Zulus at Rorke’s Drift.

Of course, there is another way to sleep at night: Buy an ETF. In fact, build up a portfolio comprised solely of ETFs. You are unlikely to wake in fright with an ETF—maybe with some of the more esoteric ones, but generally, the markets do not drop 25% in a day or race 25% ahead as shorts cover.

Having been in the financial markets for a long time—almost 45 years now—I have seen some of these crashes, and all I can say is there are signs. Those road signs again. The ‘87 crash was my first, and there were definite signs there. The GFC too—I remember watching Paul Barry (ABC TV) doing a report on US housing and the ‘Zombie Loans’ way before things started turning nasty. There are always signs. Sometimes we just ignore them because we are having too much fun. Guilty as charged!

The Dotcom boom was ridiculous and hardly a surprise when it finished abruptly. I was having way too much fun then too! It was never going to end well—valuing companies on the number of eyeballs that saw a website! I mean really. Still, out of the ashes were born our tech behemoths and ‘hyperscalers.’

Markets are moving much faster than ever. I am sure there are some serious AI models out there doing their thing. ETFs—especially vanilla, ungeared ETFs—give you stress-free sleep. Of course, you are never going to make a life-changing investment, at least in the short term. No PME or Nvidia investment. But ETFs are a great way to build wealth slowly and patiently.

One thing that is important is to check that what you are buying is what you thought you were buying. There is a lot of marketing surrounding ETFs—much like there used to be in the long-lost and forgotten Managed Funds business (whatever happened to them!). Plenty of pounds spent by the providers. I remember those magnificent Hamish roadshows, where he was treated like Moses down from Sinai with all the answers.

Do not just look at the title or the stock code—look at the underlying assets that the ETF owns. Make sure they work for you.

Also, if you are assembling that sleep-at-night ETF, remember your schoolboy maths days: the Venn diagram. Ensure that all your ETF holdings do not have serious overlap—that then becomes concentration risk. You wouldn’t want to buy an ASX 200 ETF plus a Bank/ Financials ETF, perhaps. Banks and other financials are already 30% of the index. Maybe you need to dig a little deeper and work out which bits you really like.

I remain a stock picker, though. Call me an adrenaline junkie, but it is in my blood. Proper research and getting to know your stocks intimately are paramount. Reading the signs and keeping an open mind. Question your assumptions. The returns can far outweigh the risks in the end.

Diversification of your own stock picks helps ease the volatility pain during reporting season. That is the point of diversity, after all. Treat the two impostors, volatility and opportunity, just the same—if you can do that, yours is the earth, and you’ll be an investor, my friend.

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