In our most recent webinar, Steve Johnson, Gareth Brown and Alex Shevelev discuss avoiding speculative madness, the importance of staying invested and at the same time, holding cash when necessary. You can listen to the full webinar at the bottom of this article or fast forward to the relevant area using the time stamps provided.
“Nothing so undermines your financial judgement as the sight of your neighbour getting rich.” – JP Morgan
What defines a bull market? (3:10)
Gareth – A bull market is characterised by a time when the returns today are eating into future returns, or in some cases, recouping past lack of returns. Our psychological pitfalls surface as everyone seems to be making money. The point of view of the individual investor relates more to fear of missing out, rather than fear of actual loss.
The current state of markets (7:40)
Alex - In recent weeks we have seen a lot of commentary about the dip in the market. If you put things into perspective, the market has returned somewhere close to where it was in October or November. If you were thinking back then that the market was overvalued, you would probably make the same valuation now.
Gareth - This could be the start of a change to a bear market, or it could just be the typical shakeout you get in bull markets like earlier in 2016. We'll all see.
Avoid the excesses (9:22)
Steve - Not all bull markets are bubbles, but all bubbles happen in bull markets.
Gareth – Bubbles are never complete flights of fancy. They start out with a real change and a real opportunity. “A good idea taken too far is probably the right way to put it.”
Steve - One of the key indicators is when people start using rationale for buying something that can be applied at any price. It doesn't matter whether bitcoin's $500, $1,000 or $20,000, you can use those same bull arguments to justify the price. Therefore, the price can rise towards anything.
A bottomed out sector on its way back up (12:50)
Gareth – The Oil sector and Oil Services sector sits at the opposite end of the spectrum. It reached the point of ‘despondency’ and ‘depression’ 12 months ago. Now, it’s transitioning towards the ‘hope’ phase.
Steve – That space is still in an interesting part of the cycle. The market is still sceptical about the sustainability of the sector. You often see that in the early point of the turnaround.
An Aussie sector with bubble-like characteristics (14:00)
Alex - A good example is some of the smaller tech companies listed on the ASX. They hijack the euphoria surrounding the success of the larger, more profitable international tech companies.
Steve - It's pretty clear we've got something of a bubble in that small part of the market. There's a lot of red flags being raised that investors should be aware of. As a case example, I referred to GetSwift in our last quarterly report. They are currently suspended and have been for a couple of weeks while it tries to explain some of its disclosures to the ASX. When it does come back on the boards, it will serve as a good example of the money that can be lost playing in this part of the market.
Avoid this very speculative behaviour. Make sure that your investment is based on income that you expect to return from the investment rather than the share price going up.
If possible, stay invested (18:15)
Steve - We are going to be in bullish markets for most of our lives, or at least markets that are going up. It is important to try and stay invested where you can.
Gareth - Your portfolio doesn't have to look like the market. The biggest bubble that I have experienced in my investing career was the Nasdaq bubble, which was really a global technology bubble. While that was some of the most egregiously overpriced companies I've ever come across, at the time there was a lot of opportunity in old economy stocks. It was a really good time to be a value investor.
Steve - You often find that these bubblish environments suck the oxygen from elsewhere. Everyone wants to own what's the latest and the hottest security and that means they don't want to own other things. That can create opportunities.
Sticking to your strategy (20:45)
Steve - As markets get more expensive, this will prove more difficult. It's important to stick to your process. You want to look for stocks that are in your circle of competence - ones that you can value, and still purchase at a margin of safety. This strategy is applied irrespective of whether we're investing in a bull, or a bear market.
Complacency in a bull market (22:33)
Alex - If you spend time examining a stock and it's not quite the right price yet, or lacks the required margin of safety, it's not time wasted. It's time that you've accumulated. It's knowledge that you've accumulated. And when that time does come around, and it can come around quite quickly, you will have the ability to act quickly.
Steve - It's easier to sit and wait for the next bear market. In a bull market, you've got to get out there every day and keep looking for those ideas that meet your hurdle rates of return.
Our stock ideas (24:22)
Alex – Freedom Insurance (ASX: FIG) and CSG (ASX: CSV)
Gareth – Technicolor (EPA: TCH)
Steve – Lloyds Banking Group (LON: LLOY) and UBI Banca (BIT: UBI)
Use cash opportunistically (29:00)
Steve - I think that flexibility and the willingness to hold cash is really important.
Gareth - I think of cash as weaponry, as optionality. Some investors view cash as laziness. I view it as preparedness. It's a tool we want there when panic hits and we're ready to pounce. We've seen a little bit of that in the last two weeks.
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