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Have you also been playing the what if game since the
severe market declines in 2008 and in the the first quarter in 2009?
I
know I did and, to a large extent, it kept me out of the
market last year causing me to lose out on quite substantial
gains.
It is not that I did not find any attractive investment
opportunities,
I was just frozen like a rabbit in the headlights by the banking
crisis, Lehman bankruptcy and sudden market decline.
Frustrating but too late to do something about now.
Last year my
number one what if question was: What if there is another
sharp decline should the economy stall after its jump start and steroid
boost through stimulus spending? Which led me to think that: As the
markets hit new low it will be time to get in!
It never happened and I watched the market take off with me just
watching.
I did however earn a return of 6.5% on my portfolio while being about
70% in cash but it could have been a lot better.
So what to do?
What I realised is that at
any point in time there are a thousand things that can go wrong with
the world economy, country economy and the company you invested in. At
the same time however there are a thousand things that can go right.
Companies
aren't static entities, they constantly change, new products get
developed, businesses or divisions get sold or closed, and they fight
for survival. So there are a lot of positive things that can happen as
well.
The key to profitable investing is not paying for all the positive things that may happen
and to invest if you find
something undervalued. Irrespective of market conditions.
What we must do then is to look for companies where the worst or all
negatives are
reflected in the price. That way we get all the positive developments
for free.
How do we find these companies?
The best places to look are:
- The daily 52 week or all time low share price list
- Companies with the highest dividend yields
- Companies with the lowest price to earnings ratios
- Companies with the lowest price to book ratios
But
wait a minute, you may be thinking. There are also a lot of junk
companies in these lists. Companies that are in a dying industry such
as newspapers, companies with inflated past earnings due to a bubble or
industry tailwind such as commodity companies and US, Irish or Spanish
construction companies last year.
You would be 100% correct. But
you know what, it does not matter.
Because
numerous long term studies have shown that indiscriminately buying the
cheapest companies using for example price to book or price earnings
ratios leads to index beating performance. Not every year, but on
average over long periods of time.
Even if you do not
indiscriminately want to buy cheap companies this is good news. What
you need to do is further analyse the companies on these lists to
identify worthy investments.
Look
at it this way,
analysing companies on these lists are like digging near a rich
vein of gold. There may still be some rubble around but its a lot
easier to find gold than for example just starting to dig anywhere
or for example analysing current hot companies being talked about
in the media. Apple is an example where the current price reflects
only positives developments.
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So in summary
There is always a 1000 reason not to invest, but if there is a really
compelling opportunity we have to make use of it.
With the markets having moved up so much the
obvious companies are gone. But if you look carefully and am
willing to turn over a few rocks there are still very good investment
opportunities around.
You can do it yourself or you can take a look at my subscription service
where I uncover hidden gems every month.
In
the current issue, for example, I reveal an opportunity
in a depressed sector where there is great value. Despite the bargain
prices, investors are still scared of this corner of the
market. Its business in controversial but it is up just over 10% since I
recommended it in January.
As Warren Buffett said "Be fearful when others are
greedy and greedy when others are fearful." In this sector, fear rules,
but I think it's time to get a little greedy.
Your digging in the dirt analyst
Tim du Toit
PS Don't forget to jump back to our Newsletter Archive.
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Worth Reading
A very interesting interview " Looking for Large Caps on Sale"
with Bill Nygren long-time manager of the Oakmark Fund. The fund has an
outstanding track record. Up to the end of January 28, the fund’s total
10-year annualized return of 6.50% beats the S&P 500 by 6.95% and
beating 98% of its Morningstar rivals by 5.84%.
To my mind Jeremy Grantham is one one of the finest financial minds
around. I eagerly read everything he writes. His January quarterly letter is as
insightful as always and contains the following:
Lessons Learned in the Decade
- The Fed wields even more financial influence than we thought.
- Low rates have a more powerful effect on driving financial assets
than on driving the economy.
- The
Fed is capable of being extremely out of touch with the real world –
“what housing bubble?” – plus more doctrinaire – “no, the low rates had
no effect on housing” – than anyone could have imagined.
- Congress
is nearly dysfunctional, primarily controlled by large corporations,
and hamstrung by the super majority now routinely required in the
Senate.
- Government administrations can be incompetent for long periods.
- Poor leadership can really damage a country’s hard won reputation in
a mere 10 years.
- Obama is not a miracle worker!
- The leadership of major corporations can be very lacking in insight
and competence on a fairly routine basis.
- The
two time-tested investment tools, value (P/E ratios and P/B ratios) and
price momentum, are now much more heavily used and not so reliable as
they once were, say from 1977 to 1997.
- Asset classes really are
more inefficiently priced than individual stocks on average, and
therefore offer greater opportunities for adding value and reducing
risk.
- Developed countries, including the U.S., are past their
prime compared with developing countries: it is indeed a new world
order.
- Education and training are the keys to increasing wealth
on a sustainable basis and the U.S. is in danger of losing its once
large edge here.
- We all live on an island, which can be
overexploited and turned into a barren Easter Island if we are not
careful. Resources are finite and biodiversity is fragile, and both
must be protected. Carbon emissions are the single greatest threat.
- Being a global policeman is expensive, and somewhere between
difficult and impossible.
- The Fed learns no lessons!
Read the whole letter, it is
really worth your time and can be found at www.gmo.com
The Financial Times thinks that Germany’s recovery may be stalling.
Living in Germany I know that a lot of businesses are struggling. But
more importantly if the economy does not recover by the middle of the
year unemployment will increase by about 1.2 million as government
supported job programs run out.
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