George and I have spent the last week analysing performances of the portfolios to the end of the third quarter and he has written a detailed report on the results.

We are pleased that the returns for the portfolios are considerably ahead of benchmarks (the active management has outperformed the passive markets) over 12 months.

However, in 2014 the portfolios are slightly behind with the lower volatility portfolios faring better. We would expect higher Beta (volatile to the market as a whole) portfolios and funds to do comparatively poorly in falling markets just as they outperform when markets are hotter and rising but we have worked hard to mitigate this downside and so far so good.

What’s been happening?

At the beginning of the year we wrote cautiously about the contrarian danger to markets of very bullish sentiment. Our concern was that markets were coming off a stellar 2013, the volatility measurements (such as the VIX) were very low and most people were hyping up another great year in 2014.

Our question to this consensus however was to look at what was possibly coming, what could be going and the valuations of asset prices.

So we asked.

  1. If things get better rates will rise which the market won’t like
  2. If things happen that keep rates low they will likely be negative for markets
  3. Asset prices are at or slightly above historic norms, if they rise strongly from those levels that’s bubble territory which the central banks won’t want

These possibilities did not suggest to us another very strong year.

Unknown Unknowns

As much as future analysis of the likely trajectory of economies and companies is valuable they can subsequently be rendered obsolete if an unknown event occurs (something not factored into estimates)

This year there have been a number.

  1. Ebola
  2. ISIS
  3. Russia and Ukraine
  4. European economic problems (Germany is now officially in recession)
  5. The significant falls in energy prices (oil and natural gas)

What to do

The reality is that such events are always a possibility and their likelihood does not alter. What alters is the sensitivity of markets to the fear of them.

In essence this is the inefficiency of a market, the human emotional element.

At the beginning of 2014 all looked rosy, markets (which are just the collective opinion of all the individuals who make it up) were bullish in sentiment and prices were full.

Today markets are more fearful, the “what if” question can be asked about a number of different situations and therefore prices of riskier assets (equities) have fallen to reflect this.


My own investments in stocks have fallen recently; BP is down as an example.

My belief however is that this is an opportunity to buy more at a better price as what is proven over and over again is that if attention is paid to buying high quality companies with great businesses at lower than average prices, profits over time will follow.

Such opportunities come generally in periods of heightened concern which is why most find difficulty in acting.

The key (and the fundamental ability we search out in the portfolio fund managers) is to invest in quality at a price that understates true value and then let time do its work.


Read: Quarterly Portfolio Update

Read: Quarterly Market Update



NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.