Tuesday, 7 April 2009

Fortune favours the patient

The rally in risk assets over the last couple of weeks amounts to nothing more than a short squeeze. Fundamentals have not changed, indeed some measures such as the recent Non Farm Payrolls and today's -13% YoY UK industrial production number continue to worsen.

However, it is important to distinguish between absolute and relative risk/reward ratios and between trading and investing. Trading, a more 'sexy' name for market timing, is either for the fortunate or the brave, whilst investing, based on sound analysis of long term risk/reward prospects, is for the patient.

The longer the world's economic problems go on unresolved, the longer the recovery will be delayed, causing the price of risk assets to grind ever lower. So, should the investor sit tight in cash and invest only at the inflection point? Of course not. Not only is it impossible to consistently time the market, but also the opportunity cost of holding cash or government bonds is low given their current yields. Thus, make steady investment into risk assets, locking in attractive risk premiums by buying from impatient market timers, disillusioned that the world has not infact recovered overnight.

Fortune favours those with the patience and tenacity required for a long term investment horizon, just ask Warren Buffett!

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