When markets get vicious: why long-term investors can profit from short-term markets

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Markets are noisier, faster and more reactive than ever. But does short-term thinking create long-term opportunity?

In this episode of A Value View from The Merchant’s Trust, lead manager Simon Gergel explores how modern markets have largely shifted away from individual stock picking towards momentum, passive flows and broad market positioning.

Simon discusses how short-term behaviour, driven by hedge funds, basket trades and factor investing, can lead to sharp and sometimes ‘vicious’ price movements, with shares rising or falling regardless of their underlying long-term value.

He explains why this environment can be uncomfortable for investors, but also why it creates opportunity. As markets focus more on short-term news and sentiment, long-term value can be overlooked, opening the door for disciplined investors to identify mispriced companies.

Listen to discover how experienced value investors navigate market noise, stay focused on fundamentals and turn short-term disruption into long-term returns.

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SG: The market is very different. It's much less about trying to value and buy individual companies based on their own criteria, and much more about trying to get a position in the market. You have to be very disciplined, and you have to be strong enough to back your judgement, even when it can be quite painful.

JC: Hello and welcome to A Value View from the Merchants Trust. I'm Jon Cronin, and in this episode I'm joined by Simon Gergel, lead manager of the Merchants Trust. Now. Markets today can feel noisier, faster and more reactive than ever. Passive flows, hedge funds, basket trades, momentum. All of that can make short term price moves feel, well, pretty brutal. But for some, this kind of environment doesn't just create risk, it also brings opportunity. So if markets are increasingly driven by short term behaviour, where does that leave long term value investing? Well, Simon, it's great to have you with us, and it's a fascinating question.

SG: Hi Jon, it's great to be here today.

JC: Well, let's jump in and let's just think about some of those those thoughts. But let's go to the big picture first. What's changed when you look back? What's changed from when you started managing money?

SG: Yeah, well I started in the late 1980s, and in those days, most of the investors in the market were either individual people or individual institutional investors buying individual companies one at a time. Today, the vast majority of trading is done on behalf of funds, often passive funds buying the whole index or basket trades, buying a basket of growth stocks or, you know, defence companies, or hedge funds putting enormous trades around very short term trading news and trading predictions. So the market's very different. It's much less about trying to value and buy individual companies based on their own criteria and much more about trying to get a position in the market, giving us exposure to a certain factor or a certain view.

JC: So a lot's changed basically in that time.

SG:Yeah, enormous amounts change. I mean, the volume of trading is hugely more than it used to, but there's a lot less attention on individual companies and much more on getting a position and exposure in the market.

JC: Okay, Simon, so you talk about factors. What do you mean by that?

SG: Well, it could be a factor like growth companies with high growth or quality or value. So these are different ways of investing and getting exposure to a style of business or we call it a factor. So an exposure to high growth companies, for example.

JC: And you've also talked about momentum. You mean buying when things are already going up and avoiding what's going down?

SG: Yes. Momentum really encompasses two different things. So one is buying shares that are already going up or selling those that are going down. And the second is buying companies where they're getting, expectations are going up. So they're seeing upgrades to forecasts. So there's good news coming out. People are getting more excited and predicting higher profits in the future. And those are very powerful drivers at the moment. There's a lot of money chasing momentum, either companies going up, share prices going up, or companies with good news and seeing earnings upgrades. And that's really quite powerful at the moment.

SG: And the reverse for companies seeing downgrades or going down.

JC: And on that on the reverse, that's where it can get pretty uncomfortable in the short term, can't it? So why do you see an opportunity there rather than, than a headache?

SG: Yeah. Well, if you imagine the more people focus on the short term and what's going on today and next week, the less they're focusing on the long term value. And those two, those two things can be aligned. But very often they're not aligned. You can have a company that's going through a tough time today, and it might be worth a lot more in the long term, but we don't know when that long term is going to come through and the shares can get cheaper and cheaper, and that can be very uncomfortable if you're sitting there with a position in a company that you think is worth twice the share price, and it comes out with a slightly disappointing trading update and the shares fall another 10%. That's an uncomfortable position to be, but it's creating a bigger opportunity.

JC: Okay, so what you're saying here is that the more impatient the market gets, the more chance there is there for patient investors.

SG: I think that's right. I mean, another way of saying it is the more efficient the market is at absorbing new news in the short term, in a way, the less efficient it becomes at thinking about the long term.

JC: You've said in the past that markets can be pretty vicious in this environment. Those are strong words. What do you mean by that? What do you mean by vicious particularly?

SG: Well, coming back to what I'm saying, if you own a company where you think the shares are very cheap and quite depressed, and then they have some more bad news and the shares fall further, they can fall quite a long way here, almost irrespective of how cheap they are. It really doesn't seem to make too much difference at the moment how cheap a share is if it gets bad news. The shares almost always go down, and sometimes quite a lot. So taking a long term view. Trying to ride that out can be quite painful. So it can feel quite vicious. And the flip side of it is if you've got a company that's doing well and in favour and it comes out with good news, often it can go up more than you think it should.

JC: And I suppose that's a reflection on the fact that it's not always careful analysis that's coming into play here. Sometimes it's just capital moving en masse. It's the the herd mentality.

SG: Yeah. I mean, I think we've got to be careful saying it's not it's not proper thinking because there are a huge amount of people and a lot of money chasing short term momentum and trying to identify companies that might get those, those upgrades and might get that good news and see the share price go up further. So it's not necessarily dumb money or there is there is often thinking involved, but it doesn't stop the fact that you can get these great anomalies and that that shares can move further and further away from where they should, whether intrinsic value is because of the focus on the short term. Does that make sense?

JC: Yeah. Yeah, no I get you. So let's, let's bring this into focus then from the perspective of the Merchants Trust, because I guess this is where a structure like an investment trust, which of course is what the Merchants Trust is. That's where it matters, isn't it?

SG: Yes, absolutely. And there's some great features of investment trusts like the Merchants Trusts which give, give us the capability to stand back and take that longer term view. So the first is we have permanent capital Merchants Trust has been around for, you know, 138 years or so. And that means that we can take a long term view. We're not going to be forced to sell a share that's going down just because the shares are going down because money comes out of the fund. So we can take a long term view and look through it. And the second thing is we have a very clear investment philosophy and an investment approach. And when it's backed by the board of directors who, you know, they monitor us, they challenge us, but they ultimately support us to implement that strategy. And so we have a very clear view looking for income, looking for capital returns. And we can take those long term views, which if you had money that can go in and out the door, it can be much more difficult to take those long term views.

JC: And I guess also you're just not being pushed around by other people's, decisions, other people's time horizons as well.

SG: Yes. I mean, psychologically, it's difficult to do. It's difficult to stand away from the, the herd, if you like, or the market. But we are not being pushed to do that by, by the board, who are very supportive. and, you know, that's what I suppose ultimately, that's what our job is to do, is to stand back and take advantage of those opportunities, even when and perhaps particularly when it's quite painful.

JC: Does that mean you have to be quite brave?

SG: You have to be very disciplined and you have to be strong enough to back your judgement, even when it could be quite painful. But you've got to also remain humble, because we do get it wrong sometimes, and sometimes and quite often the markets right. You know, it tells you there's something going wrong in a company. You have to be alert to where there's a real challenge or a real potential change. But equally you have to be able to other times stand back and say, actually, we believe in what we're doing, we believe in the value here, and we're going to ride it through.

JC: Okay. I guess that's where the experience comes in, isn't it? Having managed money for, you know, some time you get to see things perhaps with a different perspective as well. Look for somebody who's watching or listening to this for the first time, Simon, and maybe doesn't live the jargon all day long. what would you say is the simplest way to think about the approach that you're describing here?

SG: I suppose the simplest way is to say that the market is not rational in the short term. So there's a lot of noise, a lot of activity. But the market is prone to wild swings of emotion, of, of fear and greed. And that can create opportunities. If you have a genuine view of what a business is worth in the long term, you can take advantage of that irrationality of that noise in the market and take a position. Take an investment decision based on a long term view. And that can be the opportunity.

JC: And that's that's where the value investor lives, isn't it?

SG: Oh, absolutely. The value investor is, is always trying to identify companies that are mispriced on both sides of the equation and really to invest in those that are significantly undervalued and to hope that that valuation gets recognised or that undervaluation gets recognised over the next 2 or 3 years.

JC: Okay. Fascinating subject, Simon. We're going to have to wrap it up now. But, your final thoughts. How would you sum this up?

SG: I would say the market has become much more short term over the last 20 years. The people operating the market are often trying to do very different things. It's much less about trying to understand and value each individual company. And it's much more about, taking a position and trying to identify theme and positioning for that, and that has challenges in the short term. It means that markets are very volatile, but it creates enormous opportunities. If you can stand back and really take a long term view, you can really take advantage of that.

JC: Okay, Simon, fascinating subject and conversation as ever. Thank you so much indeed for your time.

SG: Thank you Jon.

JC: And if you've enjoyed this episode of A Value View, do subscribe, leave us a comment and share it with anyone interested in long term investing and market thinking beyond the headlines, and you can find out more about Merchants Trust and read and watch Simon's latest investor notes by going to MerchantsTrust.co.uk. Next time we're going to talk about having the courage of your convictions. When a falling share price isn't necessarily a broken investment case.