Rudi’s View: ‘Be Respectful Of The Past’

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Dec 03 2020

Dear time-conscious investor: Share price volatility does not equal risk, and this week's All-Weather Stock proves exactly that

In this week's Weekly Insights:

-"Be Respectful Of The Past"
-Question Of The Week
-Mayday. Mayday. Website Down

By Rudi Filapek-Vandyck, Editor FNArena

"Be Respectful Of The Past"

As every battle-hardened investor knows: achieving investment return comes with acceptance of risk. In the short term, taking on a lot of risk can be extremely rewarding, but in the long run reducing risk is key for survival.

Too many investors confuse "risk" with "share price volatility". There is almost always a fundamental difference, even though the result might look similar in the short term. Admittedly, we all feel bad when our asset or portfolio takes a deep dive, but that's only a bad event when that deep dive turns into a permanent new development, which it seldom is assuming there was more than just a temporary fad behind the share price rise in the first place.

One way to reduce risk is to stay alert for potential trend reversal cum share price weakness, but investors with a longer term horizon will inevitably discover jumping on and off stocks that display share price strength, then weakness, is sub-optimal and energy-consuming under the best of circumstances, not to mention the accumulation of costs and the loss of opportunity that both eat into the total return.

Option number two is to minimise risk through one's knowledge of the company and why it is in the portfolio. The deeper the knowledge, the greater the conviction and the comfort of holding on even when the share price is temporarily no longer strongly trending  upwards. If we are really comfortable, we might even add more money in order to boost future return.

But how does one know, really? We can all make forecasts and predictions, but that's all they are: an educated stab in the dark, at best. Forecasts do not always resemble actual outcomes, and that's probably putting it mildly.


Last week, I came across the following statement on Twitter (thanks Motley Fool):

"Successful investing requires being respectful of the past, indifferent to the present, optimistic about the future, and skeptical of salespeople."

To minimise risk, I believe sound company analysis starts with paying respect to the past. Too many investors ignore the past and simply stick with "being optimistic about the future". Works sometimes, and often for a brief moment in time only.

The past does not provide all answers, for obvious reasons: economies change, circumstances change, cycles strengthen and deflate, but there are many valid clues and indications to be had from a company's past, including whether a business can withstand tougher times, pick itself up after unforeseen misfortune, and how successful it can defend its home turf.

As a long-term investor who has the intention to stay on board for a long while, it is almost of paramount importance we suss out the solidity and the sustainability of the business, for on what else are we basing our conviction and comfort to hold on when the share price moves in the wrong direction?


Let's start with the basic premise, derived from many years of market observations and company research: unless a company or the sector in which it operates is severely disrupted, a business that has successfully navigated through the major challenges of the past is most likely to continue doing exactly that in the future.

This is how a company's past track record can provide a whole lot of confidence about its future.

It is on this basis that I often refer to TechnologyOne ((TNE)) as "by far the highest quality software services provider listed on the ASX", or when put in a less sector-specific context, "one of the highest quality, most reliable performers in the Australian share market".

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