Ophelia storm is on the way: Time to sale some stocks?


Ophelia storm is on the way: Time to sale some stocks?


It was Monday night and as we were urged to stay home due to bad weather conditions, I decided to write a blog .I had the motive but not the topic though. After a while, I came across an article on the Financial Times called ‘’Financial models are no excuse for resting your brain ‘’ which triggered me to start writing. The article written by Mr. John Vay mainly discusses the fact that passive strategies are not as effective as they used to be .To be more precise, the use of historic data does not show the correlation of many assets and recommend investing in well established companies rather than small growth orientated ones. “Diversification is a matter of judgement not statistics”. But on what extent is that true? Should we rely on passive strategies and obsolete -as they call them- theories like Modern Portfolio Theory?
 In order to seek for the answer have to look at some theory first…
Active management refers to certain strategies that help the manager exploit market inefficiencies. Such strategies take into account mispriced securities, social/political issues and even the weather (It is stated that during sunny days the stock market follows an upward trend)!
Passive investment strategies are defined as the creation of a portfolio which is allocated the same way as an index (i.e. FTSE 500). The main goal of this kind of the strategies is to generate a return similar to the specified index (not more). These strategies emphasize only on the long term returns. Their main – and controversial- cornerstone is the Modern Portfolio Theory and the use of historic data in order to generate the most efficient portfolio. It‘s main assumption is that the future asset value will follow the same trend as in the past.
Now that we are done with the boring part let’s try to put the theory in action…
Could passive investment strategies predict the economic bubble of 2008 by using historic data? No. However, is that an excuse to not use them? Definitely not!
Personally, I am in favor of them because in the modern as well as technologically advanced stocked market, there is simply no opportunities to exploit mispriced financial products. Not only did the number of investors climb to unprecedented levels but also the instant communication provided via 320000 Bloomberg terminals eradicates any chance of “hidden information”. In addition to this, some fluctuations may cause the investor to take the wrong decision. For example, this year Netflix shares reached a record-high value of £205.65. Does that mean that a current shareholder should sell his shares now or keep them in hope of the share price rising even higher? In reality, no one can give a straightforward answer because no one knows if this rise is just a fluctuation or a trend.
Another example is the Chinese shares. People’s bank of China decided to reduce the targeted interest rates and the reserve ratio requirements. Thus, the Chinese A shares had stunning daily fluctuations (on Monday and Tuesday the value dropped by 20%, while on Wednesday it raised by 10%). If an investor adopts an active strategy this volatility may prevent him from seeing the long term trend.
To conclude, I would like to mention that if you manage a portfolio or mutual funds it doesn’t matter whether you adopt a passive strategy, an active one or even follow your own intuition. If at the end of the year your clients get a check with their name written on it, they will not bother to ask.

Until next time stay safe.

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