Navigating market noise and managing risk in modern trading

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HILTON TARRANT: It’s far too simple to get caught up in the latest hot stock or sector or idea on the market. A conversation around the braai, at work with colleagues, or even on social media may easily influence your investment decisions.

The problem is, of course, that blindly following someone else’s investment idea without doing your own research means you’re effectively investing with their risk appetite.

Tinus Rautenbach, business head of Clarity by Investec, joins us now. Tinus, thank you for your time.

We live in this hyper-connected world. There is so much information and noise and opinion, and it’s able to be amplified on social media platforms such as X, TikTok and Reddit. We’ve even seen this term ‘meme stock’ created with a specific reference to a phenomenon in US markets.

Why should investors avoid blindly following the next big thing they spot – either in conversations or on social media?

TINUS RAUTENBACH: Yes, thanks Hilton. Good to connect. In this hyper-connected world, as you say, you’ve got so much noise coming at you, and it is so easy to therefore follow the latest and greatest. That creates a whole lot of risk that you might not have signed up for.

So it is important again to start with why you want to get into trading or why you want to get into investing. What is your purpose? What is your plan? What is your risk appetite? How much would you want to risk in any one trade?

But then also just what is your expected outcome? Do you want to be in this for three months? Do you want to be in this for five years? Do you want to be in this for 20 years? All of those things influence the types of investments that you look at, the types of trades that you want to execute.

And you must make 100% sure that the places that you use to get information to drive your decision making, to drive what you’re thinking about, are exactly the same places that align with what your planned outcome is.

So if you are a day trader and you want to follow the market daily and look for small variations in price, et cetera, then maybe Twitter or some of the other high-frequency news sources may be the right place for you.

But if your risk appetite as well as your ability to follow the market – and the amount of time you can spend in front of your screen, et cetera, is potentially only a small amount per day, or maybe even a small amount of time per week – then you need to adjust your news sources and where you think about looking for investment ideas accordingly.

Think a little around what your appetite around risk is, what amount of time you can spend thinking about your investments and your trading, and then filter that to the new sources to be appropriate.

HILTON TARRANT: Tinus, let’s explore the risks. Why would an investment or a trade that makes sense for one person – for instance me – possibly be completely inappropriate for another person, for instance you?

TINUS RAUTENBACH: Maybe it’s just easier to use a slightly different example.

The risk appetite for someone in their early 20s, just starting a job with a certain amount of monthly income and a certain amount of free cash flow potentially available to risk or to invest, potentially not having been able to build up a safe nest egg or your ‘rainy day’ fund, that risk appetite is potentially very different from that of someone that is in their late 50s, has saved all the time and money that they want to [invest], and is really looking for something else out of the market for a short-dated view, potentially, with a very specific investment thesis.

So you can very easily see how not only age, but age is a very simple way to think about the difference in risk appetite – and what is more appropriate for someone maybe late in life relative to someone early in their careers.

And therefore your planned investment, your target return and your target risk are very different.

HILTON TARRANT: You’ve mentioned age and life stage there, and that links to kind of the context of that individual, what other responsibilities they might have. Maybe they’ve got two children at university and therefore their risk appetite would necessarily be very different from someone else’s.

TINUS RAUTENBACH: 100%. So context is definitely a better holding for the concept, because it depends on the context that you’re in.

And your context might also change from day to day to week to week, due to an unforeseen event. And therefore you’re allowed to take only a certain amount of risk.

I want to come back to you, though, in that even though context changes, the more time you can spend thinking and learning about a certain domain – and trading and investing is just another domain – the better you get with it in time.

And therefore it is easier to understand what the right and more appropriate investment is for the context you’re in.

HILTON TARRANT: So along with that, obviously, it is incredibly critical for a trader or investor to just figure out how much risk they’re able to take – and willing to take?

TINUS RAUTENBACH: It comes back to the simple adage that’s basically saying ‘Plan the trade and trade the plan’.

The plan, the trade bit, is to be 100% sure around the maximum amount of value you are willing to risk on this specific trade idea, investment idea.

Once you have a handle on that, you can then size your transaction appropriately.

So if you know that you want to risk only R1 000 on this transaction, and you don’t expect this specific stock, the ETF index, to drop more than 10%, and you think that your thesis is then wrong, then you know that you can risk R1 000 for a 10% move.

Effectively, you know that you can then have a call it R10 000 investment to be able to take advantage of this trade idea.

So once you know what your risk appetite is, then you can size your trade for that specific investment thesis.

HILTON TARRANT: Tinus, just to close off with, given all that we’ve discussed, how does Clarity – and the tools that are available on the platform –help investors and traders?

TINUS RAUTENBACH: Hilton, we’re lucky. Technology enables us to have access to a massive amount of information, but also helps us to filter that information. And then when you come to executing your transactions on the platform you’re able to, for instance, place a stop-loss order or a take-profit order.

Both of those are effectively ways for you to think about your risk and your profit appetite prior to placing the trade.

It just gives you the tools to actually implement this sort of risk-conscious way of trading and investing.

So for investors who are starting out or want to think maybe in smaller amounts, et cetera, we have fractional shares on the platform – which means it’s easier for you to do that kind of planning on the side of nominals and notionals that you want to think about, instead of being forced into a whole share, which in certain situations might not be the appropriate thing.

So we’ve got some fractional shares. We give you the ability to place stop-loss and trade take-profit orders. That gives you quite a wide toolset to be able to implement this risk-based approach.

HILTON TARRANT: Tinus Rautenbach is business head of Clarity by Investec.

Brought to you by Clarity by Investec.

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