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Plan for the worst, hope for the best

Wilson Asset Management's Geoff Wilson has encouraged investors to plan for the worst and hope for the best as central bank liquidity props up equity markets.

However, he warns, "hope is not a strategy", and recommends investors accept that things have changed and quickly adapt to the new world.

In a recent video, Wilson argued investors should remain cautious in the months ahead.

"We've seen the liquidity being pumped into the system its sort of brought valuations, brought the whole market back up again," he said.

"I'm still very conservative in terms of my positioning. What I've learned over time, whether it's the '87 crash or the GFC, is you're better off erring on the side of caution."

Wilson is still slightly bearish, and believes the economic recovery will take longer than what is currently being priced in.

"We've still got a lot of unknowns that will become clear over the next two, three and six months," he said.

"Would you be buying with your ears pinned back now? To me, you've got to have enough cash so you sleep well at night because the market always does provide opportunities."

He recommends investors work against their emotions and accept that every market dislocation is different.

"The '87 crash was the market falling 10%, and then on one day falling significantly," Wilson explained.

"You've got to play what's in front of you in terms of the market, because every market dislocation is different."

However, there are still positives on the horizon, he argued, with equity markets likely to climb on a "wall of worry" over time.

"We're always nervous on the way up in the bull market," Wilson said.

"One of the good things about bear markets is they're a lot shorter than bull markets. What we do know as investors is that equity markets over time deliver you exceptional returns."

Quoting Baron Rothschild, Wilson said investors should "buy when blood is running in the streets, even if it's your own."

"When the market falls and it falls significantly, then some of the blood is your own," he said.

With markets falling approximately 35% with unprecedented speed following the longest bear market in history, Wilson said he wouldn't be surprised if the bear market significantly differed from those seen before.

"You'd probably expect the longest bull market ever to be followed with a longish bear market," he said.

"When there's liquidity pumped into the system, as we've seen globally and what the [Federal Reserve] has done, then it's really hard to fight that liquidity."

Every investor will be negatively impacted in a bear market, he said, but its how quickly they can make that money back that is the sign of a good investor.

"It's how you take the opportunities as the market rallies," Wilson said.

"In the first couple of weeks, we were putting together the list of stocks that we wanted to own in the next bull market and really looking for those opportunities.

"We knew from history that you're going to have companies that are going to have to raise equity during these periods."

Repositioning for flexibility and liquidity, WAM Leaders, Global and the mid-small cap team had taken advantage of equity raisings in the current environment, Wilson said.

Although sentiment in LICs plummeted as markets fell, Wilson believes there will still be opportunity over the medium term.

"Before the market fell, the larger LICs were trading on average around NTA. It tended to be in the mid and smaller LIC's were at the discount," he said.

Although discounts have increased on LICs, they would reduce again over the medium-term, he said.

"I love the opportunity of buying a dollar of assets for 80 cents. Hey, I'd love to buy a dollar of assets for 50 cents," Wilson said.

"So if you can take a medium-term view, you know those discounts will dissipate over time."

Read our full COVID-19 news coverage and analysis here.

Read more: LICsGeoff WilsonWilson Asset ManagementBaron RothschildFederal ReserveGFC
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