January started off as 2020 ended with extremely strong stock markets, but largely ended flat as volatility reared its head again late in the month.

There was a noticeable increase in volatility over the course of January. There appeared to be forced selling of core long positions by some US hedge funds to compensate for the significant losses incurred being on the wrong side of the short squeezes. Retail traders co-ordinated through social media to drive heavily shorted stocks much higher, and forced short sellers to cover their positions. This created some violent moves in the shorted stocks that were being targeted, but also meant stocks that were producing great results in reporting season, such as Facebook, Apple and Microsoft for example, were not being rewarded and had their share-prices suppressed post earnings.

At Pie, we don’t short stocks because of the asymmetric return profile, losses can be unlimited but gains capped at 100%, the natural bias of the market to go up over time, and the mental damage that can occur being correct on the stock call but wrong on the timing. Now there is also the element of organised investors actively targeting stocks with high short-interest. Ideally, we may benefit if stocks we own that have high short-interest are bought back by the short sellers! However, we respect the work of short-sellers as often they do more in-depth research than long-only funds, and they help keep companies and management teams honest.

Speculation is often rife in markets of all types as markets are a venue for a collection of individuals to trade. As individuals, we are prone to tendencies such as greed and envy which exhibits itself in the fear of missing out. There is a strong emotional pull to get involved when everyone else seems to be making money, but what the wise do in the beginning the fools do in the end.

Some of the warning signs I personally look for to highlight over-exuberance or excessive speculation are a plethora of stock tip sheets being released by new stock gurus, many first time investors entering the stock market, the hailing of new star fund managers and a blind replication of what they are investing in and, finally, a lack of focus on valuation of companies.

From my perspective, there are definitely areas of the markets that are overheating, such as IPOs, blank cheque companies, EVs and some high-flying technology companies, however we were not smart or fortunate enough to be early to many of these and we are more than likely now late.

Global reporting season begins

Reporting season has begun well for our global companies and we have had a number of quarterly updates from our Australasian companies. The interesting dynamic this year will be the reopening of borders, when it occurs and how feverish the demand for travel will be. We have seen a shift from spending on services which was taking more share of wallet for many years, to a rapid change to spending on goods during the Covid pandemic, causing significant boosts to many industries. However, this will revert at some stage and the markets will be forward looking. To prepare for this we have increased our exposure to companies benefiting from a reopening of the economy in recent months.

Past performance is not an indicator for future performance. This is not intended to be financial advice and does not take into account any particular person’s circumstances. Before relying on this information, please speak to an independent financial adviser.