One of the most common and costly investor biases is the tendency to “take profit too early.” After a period of strong performance, many investors feel an instinctive urge to sell, reasoning that an asset has “rallied too much” or “run too far.” These phrases sound prudent, but they’re grounded in intuition rather than evidence. We see this pattern repeatedly — most recently in South Africa’s bond and equity markets, and even in the rand’s rally. The narrative was simple: markets had moved up too fast, so it must be time to lock in gains. Yet when we examine the data, there was no objective signal that valuations had become very stretched or that risk premia had compressed to dangerous levels. The decision to sell was psychological, not statistical. That is precisely why systematic processes matter. Human judgement is naturally short-term and emotionally reactive. A scientific investment framework imposes discipline: it measures, tests, and validates before acting. It’s the difference between flying a plane by looking out the window and flying by instruments — one depends on emotion, the other on calibrated data.

To quantify emotion, we look at what markets are actually paying for fear. The price of uncertainty is not hidden; it’s traded daily in the form of options. These are financial instruments that allow investors to insure themselves against downside risk while keeping upside potential.

The cost of that insurance - called implied volatility - tells us how much fear or complacency is embedded in market prices. When investors are anxious, they’re willing to pay more for protection, pushing implied volatility higher. When they’re relaxed, they pay less, and volatility falls.

This measure is powerful because it converts a soft emotion - fear - into a hard number. It’s like using a thermometer for market psychology. A spike in volatility tells us that uncertainty is high and pessimism dominates; a collapse tells us that confidence has turned into complacency.

Right now, that thermometer is reading unusually low. Across asset classes, implied volatility has fallen sharply. This means investors aren’t paying much for protection — they’re comfortable, even relaxed. In our experience, and in decades of academic research, such calm often precedes turbulence.

It’s counterintuitive, but periods of low volatility are often when risk quietly builds. When everyone feels safe, leverage creeps higher, valuations expand, and investors stop questioning assumptions. It’s the financial equivalent of clear skies before a storm. That’s why, at times like this, our systematic process becomes especially valuable. Instead of celebrating calm, our approach interprets low implied volatility as a warning signal. It tells us that markets may be underpricing risk and that we should position more defensively. In practical terms, that means trimming exposure to higher-beta assets, diversifying across uncorrelated return sources, and maintaining hedges where insurance is cheap. These are not emotional decisions — they’re the result of measured probabilities derived from empirical data.

What makes this approach distinct is that it converts behavioural noise into quantifiable insight. When most investors react to emotion — excitement or fear — we measure that emotion, record it, and test its historical relationship with returns. The beauty of modern data science is that even intangible variables like sentiment or anxiety can be tracked and modelled. Academic evidence is strong: implied volatility and similar measures have predictive power for future asset-class behaviour. Periods of extreme pessimism often precede market rebounds, while periods of extreme complacency often foreshadow corrections. These relationships are not perfect — no market signal is — but over time they generate measurable alpha, or excess returns relative to the market. Our own funds show this effect in practice. By systematically incorporating volatility-based sentiment signals into asset allocation, we’ve been able to tilt portfolios in favour of asymmetric opportunities — capturing more upside when fear is overdone and limiting downside when optimism runs unchecked.

This process requires more than technology; it requires humility. Markets are vast, complex systems, and no individual — however experienced — can consistently outguess them. The advantage lies in structure, not intuition. That’s why we often say the systematic investor’s greatest asset is the ability to ignore noise. Headlines scream about rallies, collapses, and “record highs,” but those are narratives, not evidence. Data tells a quieter, truer story: about valuations, volatility, and correlation dynamics. In the current environment, that story points to low perceived risk and high complacency — a time to be cautious, not euphoric. Our approach suggests that patience and discipline will be rewarded once again, as markets rediscover the price of uncertainty.

In the end, systematic investing is not about removing humans from finance — it’s about removing human error. It’s the scientific method applied to capital markets: hypothesis, data, testing, and iteration. Instead of reacting to what feels right, we respond to what the evidence supports. Behavioural biases will always be part of markets; they are the fuel that drives mispricing. But for those who can convert emotion into information, bias becomes opportunity. At Prescient, that is our edge — not predicting the next headline, but understanding the forces beneath it. The bond rally, the rand’s strength, the equity surge — these are surface waves. We navigate by the deeper currents of data, volatility, and behavioural measurement. In a world still driven by human impulse, systematic investing is the compass that keeps us true. And in today’s calm markets, that compass is pointing, quite clearly, toward caution.

 

Disclaimer:

Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612). Please note that there are risks involved in buying or selling a financial product, and past performance of a financial product is not necessarily a guide to future performance. The value of financial products can increase as well as decrease over time, depending on the value of the underlying securities and market conditions. There is no guarantee in respect of capital or returns in a portfolio. No action should be taken on the basis of this information without first seeking independent professional advice.

The information contained herein is provided for general information purposes only. The information and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions and views expressed in this document may be changed without notice at any time after publication and are, unless otherwise stated, those of the author and all rights are reserved. The information contained herein may contain proprietary information. The content of any document released or posted by Prescient is for information purposes only and is protected by copy right laws. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information. For more information, visit www.prescient.co.za.