Marc Faber, editor and publisher of The Gloom, Boom & Doom Report and its website http://www.gloomboomdoom.com is the modern age investment guru. He responded to some queries posed by Akash Joshi of The Financial Express on exit strategies and what works. Here are some excerpts.
What makes an ideal exit strategy while taking an investment decision? When is the right time to move out of an investment? Are there any guidelines or pointers here?
I have to confess that it was always easier for me to find distressed assets and buy them than to find a perfect exit strategy. This has also made short selling difficult for me. However, let us consider the Indian stock market.
After 1994, it declined in USD terms by 70% and was very depressed in 2002/2003 when the Sensex hovered around 3,000. Moreover, it had built a long base.
Now the index is approaching 15,000, up almost five times. Some people say it will go to 30,000. That may be the case — although not in my view. However, even if it increases to 30,000 we are talking about another 100% and not 500%. In addition, given that there are some symptoms of a bubble I do not think that the rewards offset the risks sufficiently. Therefore, I would rather be a seller than a buyer although I may miss on some opportunity. For me, to get in early and get out early has been the best strategy.
Even expert fund managers seem to be saddled with paper they should have moved out of. What do you think are some common mistakes investors make while taking an ‘exit’ or ‘sell’ decision?
The most common mistake is to buy what is popular and in the limelight. The second most popular mistake is to buy when the fundamentals look good. Horrible fundamentals and hopeless outlook should be bought and strong fundamentals and cloudless skies should be sold.
I would like to add that most fund managers are hopeless anyway since they fail to out-perform the indices.
How would ‘exit’ or ‘sell’ decisions vary across asset classes?
I would just watch television. When something becomes a buzzword such as “New Economy” in 1999/2000 and now “Private Equity”, LBOs sell these sectors. Since everything is now in fashion including art, wines, antique violins, stamps, stocks, real estate, commodities, water, infrastructure, totally useless collectibles, etc I think most assets are due for a big setback.
Is there any advice you would like to give to investors while taking an exit decision on investments?
It is better to sell too early than hold on to collapsing assets such as NASDAQ post 2000. If there is value in buying distressed assets, there must be value in selling expensive assets. Moreover, in the very long run, nothing has ever appreciated at a faster rate than global nominal GDP. Investors tend to have vastly inflated expectations about the performance of the assets they own.