Since those who don't know history are doomed to repeat it, WP is providing some lessons from 2015 to pay attention to
by Paul Lucas
Now that we’re firmly into the New Year it’s time to brush aside those unrealistic resolutions and focus on what can really make a difference to our business in the 12months ahead.
January gives us a fantastic opportunity to reflect on the mistakes of the past and look at how we can put them right in the future. With that in mind, Kara Lilly, CFA, an investment strategist, put together a series of investment lessons to learn from 2015 for Mawer.
So what are her tips?
- Beware of mean reversion assumptions
There are lessons to be learned from the ongoing fall in the price of oil throughout 2015. It was assumed by many that prices would slip but then return to a normal range of $60-$80. However, a weak level of global demand combined with oversupply meant that the price of oil failed to recover as expected – and Lilly believes we should be careful of making similar assumptions about mean reversions in 2016.
“Mean reversion is an assumption that is prevalent in investing for a reason; usually, asset prices fluctuate within a band that has been established due to underlying fundamentals,” she said.
“However, in investing it is important to understand the underlying mechanics that contribute to the price of the asset you are examining. Therefore, before we assume that oil will revert back to its ‘usual’ range, it is important to examine the context in which the price moves are happening. When a trend is thematic or structural, it can often go on for far longer than anticipated.”
- Don’t dig when you’re in a hole
For almost all investors stock will start to fall at some point. According to Lilly, it’s vital to have patience and avoid knee-jerk reactions.
“When a stock is coming down in price, it is doing so because the market, made up of a collective of thousands of individuals, is saying the price should be lower,” she said. “Now, there are times when the market is wrong and your previous viewpoint could be right; but, often, the market is telling you something. Something you may not yet know.
“As fundamental investors, the natural instinct is to presume that you know the story on a stock. After all, you’ve likely spent hours of analysis trying to understand it. But when a stock begins to deteriorate, our lesson over time has been to have patience and not act immediately.”
- You are the company
According to the Lilly, it’s important to consider yourself as a company and your habits as your employees. That way you can see your habits as something manageable… but not something that you can completely control.
“Like companies who require the right employees to execute on their vision, you require the right habits to get to your desired destination,” she said.
“What these habits should be depends on who you are and where you want to go. For investors, they might include you listening to more audiobooks or taking better notes.”
What are your top investment tips for 2016? Leave a comment with your thoughts.
Now that we’re firmly into the New Year it’s time to brush aside those unrealistic resolutions and focus on what can really make a difference to our business in the 12months ahead.
January gives us a fantastic opportunity to reflect on the mistakes of the past and look at how we can put them right in the future. With that in mind, Kara Lilly, CFA, an investment strategist, put together a series of investment lessons to learn from 2015 for Mawer.
So what are her tips?
- Beware of mean reversion assumptions
There are lessons to be learned from the ongoing fall in the price of oil throughout 2015. It was assumed by many that prices would slip but then return to a normal range of $60-$80. However, a weak level of global demand combined with oversupply meant that the price of oil failed to recover as expected – and Lilly believes we should be careful of making similar assumptions about mean reversions in 2016.
“Mean reversion is an assumption that is prevalent in investing for a reason; usually, asset prices fluctuate within a band that has been established due to underlying fundamentals,” she said.
“However, in investing it is important to understand the underlying mechanics that contribute to the price of the asset you are examining. Therefore, before we assume that oil will revert back to its ‘usual’ range, it is important to examine the context in which the price moves are happening. When a trend is thematic or structural, it can often go on for far longer than anticipated.”
- Don’t dig when you’re in a hole
For almost all investors stock will start to fall at some point. According to Lilly, it’s vital to have patience and avoid knee-jerk reactions.
“When a stock is coming down in price, it is doing so because the market, made up of a collective of thousands of individuals, is saying the price should be lower,” she said. “Now, there are times when the market is wrong and your previous viewpoint could be right; but, often, the market is telling you something. Something you may not yet know.
“As fundamental investors, the natural instinct is to presume that you know the story on a stock. After all, you’ve likely spent hours of analysis trying to understand it. But when a stock begins to deteriorate, our lesson over time has been to have patience and not act immediately.”
- You are the company
According to the Lilly, it’s important to consider yourself as a company and your habits as your employees. That way you can see your habits as something manageable… but not something that you can completely control.
“Like companies who require the right employees to execute on their vision, you require the right habits to get to your desired destination,” she said.
“What these habits should be depends on who you are and where you want to go. For investors, they might include you listening to more audiobooks or taking better notes.”
What are your top investment tips for 2016? Leave a comment with your thoughts.
