7 lessons as we navigate turbulent markets
Even for those with international holdings, the lower Australian dollar is unlikely to offset the paper losses; it can feel overwhelming.
Mentioned: Tyro Payments Ltd (TYR), Coast Entertainment Holdings Ltd (CEH), Air New Zealand Ltd (AIZ), BWP Trust (BWP), Contact Energy Ltd (CEN), Magellan Financial Group Ltd (MFG), Monadelphous Group Ltd (MND), Atlas Arteria Ltd (ALX), Pro Medicus Ltd (PME), ResMed Inc (RMD)
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Mat here standing in for Peter this week while he is on leave. He should be back next week.
Turbulence. I just visited Chicago to catch up with my peers—face to face for the first time since COVID. A few observations: 1) Zoom works, but in person is better. 2) There’s pent-up demand for corporate travel. It’s working its way through the system now and the near-term outlook is bright. But watch for recession storm clouds in 2023 or 2024 3) Boeing still knows how to make planes. Unlike markets, the Dreamliner was smooth and pleasant. I note wide moat rated Boeing trades close to 2020 COVID lows.
What to do about the elephant in the room—markets? At times like this, it’s easy to get depressed and feel helpless. Engaged investors, as many of you are, might watch sliding stock prices and do uncomfortable mental arithmetic about their portfolios’ value. Even for those with international holdings, the lower Australian dollar is unlikely to offset the paper losses. It can feel overwhelming.
So how do we make sense of this? First off, the market does not know all. “Mr Market” is the confluence of millions of buyers and sellers on any given day, as legendary investor Ben Graham taught us. Those investors are influenced by monetary conditions, future expectations and what’s for lunch. Often sensible, they are fickle and prone to panic.
In late 2021 and early 2022 investors believed “everything was awesome,” buoyed in part by the enthusiasm of a cohort of new investors who had only ever seen markets go up. Today the apocalypse is nigh and “everything is terrible”. Mr Market has swung from thinking COVID is no big deal, inflation will fade and the economy is rock solid to “Houston, we have a problem”.
But remember, Mr Market is here to serve you, not the other way around. The market offers investors prices for slices of a business, shares of future earnings. No more, no less. Sometimes Mr Market is optimistic and offers a high price. Sometimes he is fearful and offers a low price. Long term investors are here to: 1) recognise those swings and 2) act upon them to improve returns/lower risk over the long term.
I don’t have a macroeconomic crystal ball. Be wary of those who claim to. Markets will rise and fall and there will be more bear and bull markets. It’s our job as investors to notice market excesses and act accordingly, ideally in advance of big moves. I get fearful when markets are cruising as they were last year. I try to be greedy now. Markets are under pressure and pessimism abounds—that’s usually a recipe for some value being on offer.
Instead of trying to pick whether the overall market will go up or down, think about how much you are being charged to buy a business’ future earnings. I love Buffett—partly because he looks like a cuddly teddy bear—but mainly because he simplifies complex ideas. Honest simplicity is admirable and “price is what you pay, value is what you get” is foundational.
The S&P 500 officially entered a bear market, more than 20% decline from the peak. Peter Warnes and Mark Lamonica have argued that things will likely get worse before they get better. I don’t have a strong opinion either way, but on balance the odds that we are at the low now and the market bottom has passed seem slim. But that does not mean jumping on the doom and gloom, sell everything bandwagon makes sense. Markets are showing signs of pressure and pessimism abounds, and that’s usually a good start for hunting value.
The future is unknown, and that’s ok. An uncertain future is a fair price of admission to invest in markets, and access the magic of compound earnings. Rather than think about markets as providing information, i.e., the markets are going down therefore I need to get out, think about markets as offering a price. Based on our coverage, the ASX 200 is approximately 14% undervalued on average as of Wednesday’s close. Only twice in the last 15 years has the discount been greater; once in the GFC and more recently in the brief COVID crash.
In times of volatility—no matter the kind—knowledge and fundamentals give me comfort. Now is a good time to take stock of the market, and here’s what I came up with to help make sense of it. I hope this provides a useful anchor for emotions and actions should markets get better (or worse).
1) Revisit investment goals
- What’s really important?
- What are the constraints?
- What is non-negotiable?
- What is the appropriate risk tolerance?
2) Revisit savings
- For those still in the asset accumulation phase, does it make sense to increase the level of savings/investment given the reduction in portfolio values, and likely better future returns given markets have fallen?
- Saving and investing more when portfolio values are down can provide a valuable counter-cyclical bias to wealth accumulation.
- Is it possible to weather any volatility and uncertainty knowing you can work longer if needed?
3) Asset allocation
- What is appropriate given your personal goals and risk budget? It is worthwhile thinking about the appropriate asset allocation settings through the cycle as well. Here, our overall Price/Fair Value can be a useful tool to prompt countercyclical behaviour. If our price/fair value metric is anything to go by, now is likely a good time to be maintaining or raising exposure to equities, which is a risker asset class, rather than cutting.
- Increasing exposure to riskier asset classes when times are good, and optimism abounds—such as 6–12 months ago—is also likely to detract from longer-term returns.
4) Stay invested
- Markets are cyclical and will have ups and downs. Invest accordingly (it’s never too late to find solid foundations).
- Going to cash when sentiment is depressed is likely to drag on longer-term returns.
5) Behave countercyclically
- Plan to do this where possible. It may feel like the horse has bolted now, however, markets will continue to have ups and downs. Prepare accordingly.
- Even if it feels like you could’ve done better in hindsight—hindsight’s always 20/20—think about how you might play the next cycle. One need not have all the answers first go around but taking those learnings and experiences and incorporating them into your philosophy is key to future success.
- I think calling specific future cycles is hard but it’s possible to spot market optimism and pessimism and act accordingly. The Buffett quote—be fearful when others are greedy and greedy when others are fearful applies here.
6) The selloff may provide opportunities
- Did irrational optimism creep into your portfolio? Did the rising price of the securities hold more appeal than the fundamentals of the underlying assets itself?
- Is there a window for selling some holdings to reinvest in better value/higher quality opportunities? Not to sell because a certain security is down but it’s now clear the fundamentals were not what you hoped.
7) Invest in you!
- This one weww can all control. Human capital is the value of our future work, the product of time and labour rate. Education, training and experience are all ways to improve it.
- Whatever we can do to further our human capital value has the potential to compound and enhance our financial wealth longer-term.
Special Reports this week
Concern around bank bad debts and market selloff present long-term buying opportunities
AUB Group takes a calculated risk on Tysers