The wisdom of selling ahead of the crowd

Dominic Prince says that some of the world’s canniest investors have consolidated their fortunes by moving into cash as soon as economic storm clouds started to gather

Six weeks before the stock market crash of 1987 Sir James Goldsmith met the Australian financier Robert Holmes à Court. Then at the height of his financial prowess, Holmes à Court was reckoned at the time to be the richest man in Australia, wealthier than either Rupert Murdoch or Kerry Packer.

Intrigued, Goldsmith was convinced Holmes à Court must be a genius. After the meeting he began to gather as much information as he could on his business methods. But once he’d assembled the intelligence, something dawned on him that would dramatically reverse his opinion. Holmes à Court had minority stakes in a raft of companies ranging from airlines to theatres, insurance, mining, media and agriculture, and although he had made vast sums along the way, it had all been done on borrowed money in a rising market. Goldsmith figured that if there was a market correction, Holmes à Court would be wiped out.

In consequence, Goldsmith began to sell every share he owned, and in doing so he not only anticipated the crash but also profited hugely from it. Holmes à Court on the other hand very nearly went bust and never fully recovered; he died of a sudden heart attack in 1990.

There was a Goldsmith rerun some years later, albeit in a different market. On Black Wednesday in 1992, when sterling went crashing out of the ERM and interest rates fluctuated wildly in the space of a day, George Soros made a fortune punting against the pound. He is said to have scooped up more than £1 billion in a day. The moral of the story, as every investor ought to know, is that someone always wins — even in a bear market.