The stock market is a device for transferring money from the impatient
to the patient Warren Buffett
Regular readers* will have
spotted a trend emerging. I like the wisdom of Warren Buffett. Whilst he has
the peculiar advantage over most investors of being able to buy entire
businesses that he admires, he also rates as being one of the most successful
investors of all time. The reason is simple. He buys quality and lets it thrive
over the long term. The cash that is then thrown off is reinvested in acquiring
new quality businesses.
I was not surprised in the
slightest by Mr Buffett’s comments on Monday February 24th 2020 when
he said, “You don’t buy or sell your business based on today’s headlines. If it
gives you the chance to buy something that you like and you can buy it even
cheaper it’s your good luck”. Fears of a Coronavirus pandemic finally
registered properly with World Markets and they were suitably marked down by
several percent in a day. These losses continued for all of that week.
Given how the long the Bull
Market has now been running (2009-2020), it is not unreasonable for investors
to fear that this may herald in a new and perhaps overdue recession. It could.
However previous pandemics, certainly at least in the last 50 years, have not
triggered recessions. The reason being is that they tend to be more limited in
their effect on economic activity than they are given credit for. It is events
that herald a real downturn in economic activity that launch recessions and
hence Market crashes.
Back in June 2016 in the United
Kingdom, against all predictions and in one of the largest voter turnouts in
its history, the British people voted by a margin of 1.9 million votes to leave
the European Union. For all of the myriad reasons that were given by those who
voted “Leave”, almost no-one did so for pure economic reasons. In fact, for
those who voted “Remain”, to vote to leave an established trading bloc was seen
as being little short of economic suicide.
Politicians had warned of the
dangers of a Leave vote triggering an immediate recession. As the UK Stock
Market plummeted in the days that followed, their predictions seemed to carry
some level of wisdom. The view in the business world is that the real direction
of travel would not be known until the Autumn of that year.
After a torrid few weeks and some
Central Bank intervention, Markets stabilised. By the Autumn the bumps of the
Summer were in the rear view mirror. In the years since, the UK Stock Market has
recovered and posted new highs, albeit has not performed as well as some
European markets, (until recently) the Japanese Market and in particular the US
Market.
There were a variety of reasons
for the June 2016 reaction proving to be unnecessarily exaggerated. In my
personal view, chief amongst them was the fact that the UK is far from being an
island in economic terms. Investors were not going to withdraw quickly from one
of the biggest English speaking world economies with progressive business
policies unless they feared a major increase to operating cost. That clearly
wouldn’t be known for years. Furthermore, recessions in the UK, have almost
always been as a result of wider World economic downturns. There was no such
sign of that in 2016- even with the prospect of a new US administration.
You may question then why am I
harking back to June 2016? Well the falls in the UK Stock Market in the week I
am writing this (24-28 February 2020) are eerily similar to 2016. Whilst the
issue was Brexit then, the threat now is the Coronavirus. The differences are
there. The Coronavirus will be brought under control most probably before
Brexit is whilst at the same time the Coronavirus has affected Global Markets
rather more than Brexit did. Yet there is a one striking similarity. There have
been some big falls in Stock Prices. Should you run for the hills or reap the
opportunity?
My personal view is that whilst
you should always protect your capital, if you have long term convictions about
quality businesses this is the kind of opportunity that presents rarely to
acquire those shares at a discount. It takes guts to be greedy whilst others
are fearful and patience to wait for the Markets to turn. The only real risk to
this approach is that if a true Recession does hit (and it always could) it
will take a lot longer to get back to where you need to and you could of course
buy your quality shares even more cheaply.
Allow me to provide an example of
this. As we headed to the June 2016 Referendum in the UK, I became increasingly
sceptical of the generally held view that Remain would prevail. Up in the
Midlands in the UK (where I reside) there was a real split in people’s views.
Fearing that the vote would be a lot closer than imagined, I elected to sell a
whole bunch of cyclical shares that were held in my pension. Due to my interest
in property, I had had quite a high exposure to house builders and I did not
want to surrender my gains after a decent run. These were all sold along with
my airline shares. It turned out to a fortuitous move.
I will never forget the grave
tones of John Humphreys on BBC Radio 4’s Today
Programme at 7am on 17th June 2016, as he announced the verdict of
the Referendum. The Markets went into absolute shock and the falls prolonged
over the following days. I was regretting not having sold more and indeed
trimmed other parts of my portfolio at something of a loss. However, the cash
that I’d made from the sale of the house builders sat nicely awaiting
opportunity.
In that second week, certain
cyclical stocks like Persimmon (PSN), Galliford Try (GFRD) and Lloyds Bank
(LLOY) appeared at bargain prices. I’d wanted to buy PSN in particular for
years, but it was always too expensive at north of £20. All of a sudden it was
down at £11-£12. The dividend yield was north of 8%. I knew that PSN were one
of the most efficient companies in the industry. They had even adapted very
well in the 2009-2011 crash, finding new revenue streams in litigation. I
didn’t believe that Brexit was going to stem British demand for new housing,
given the chronic shortages (aided by a restrictive planning system) and
effective Government subsidy. If PSN stayed where it was I would enjoy a lovely
dividend whilst I waited for it to recover.
My strategy was rewarded much
sooner than I imagined. By the start of 2017, the Market had regained much of
its losses. My “Brexit Bargains” portfolio was up 50% (including dividends). I
slowly started to sell my positions into a rising market, buying stocks with
good online or niche offerings including On the Beach (OTB), Dart (DTG), Boohoo
(BOO), Fevertree (FEVR) and Games Workshop(GAW). I kept PSN, selling out most
at £26 eventually in 2018. All of the new buys performed well thereafter.
I’m not generally an advocate of
timing the Markets. It can be a risky game. However, there is no question that
quality can be oversold in times of Market panic. If you know what you want and
have a level of cash, you can do very well about buying quality at the right
time. If you are a long term investor, then this is often a good opportunity to
buy some decent product cheaply.
I don’t tend to panic about the
fact that I could have bought shares more cheaply. How many investors buy
shares at their lowest ebb and sell at their peak? Very few and this is often
down to luck more than chance.
As Warren Buffet’s mentor
Benjamin Graham once quipped, “In the short run the market is a voting machine
but in the long run it is a weighing machine.” In other words, if you are
willing to buy and hold quality, it will often reward you (at least eventually).
If you buy and sell on trend for the short term, you may well come unstuck.
*This blog is published subject to this disclaimer.
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