Stocks and strategies for stormy markets

Livewire Exclusive

The Dow Jones’ 2-day, 1,800-point correction, left many investors scrambling for ideas on Monday and Tuesday. By 10:30am Wednesday, many stocks had recovered close to their previous highs. While most experienced investors know that corrections and crashes can offer great buying opportunities, it’s easy to be caught off guard by the speed at which they can come and go.

To help readers better prepare for the next such opportunity, we contacted three Livewire contributors to get their view. The message from all three contributors was clear; reacting isn’t good enough, you need to be prepared in advance. We’ve pulled highlights from each of their responses, which you can read below or follow the links to the full blog posts.

Contributions come from Roger Montgomery, Montgomery Investment Management; Nathan Bell, Peters MacGregor Capital Management; and Hugh Dive, Atlas Funds.

Full blogposts

  1. Roger Montgomery: Make market corrections your ally
  2. Nathan Bell: Surviving and profiting from the market rout
  3. Hugh Dive: Avoiding the portfolio ‘torpedoes’

Keep a Watchlist

The importance of keeping a watchlist is one that Nathan Bell has raised before, but if the search queries on Livewire are anything to judge by, it’s a subject worth revisiting. The middle of a correction is not generally the ideal time to be searching for and assessing new ideas.

Nathan Bell

After fielding calls from worried friends and relatives who’ve been scared to death by disgraceful segments like the one on The Project last night comparing the recent falls with the GFC, your first response should be to check you’re comfortable with the valuations and prospects of the businesses you own.

Make sure you haven’t just read the latest headlines spreading panic before you do this, otherwise your analysis will be highly emotional and heavily biased to the short-term.

Next, check your Watchlist of stocks in case any businesses have fallen to your pre-determined buying levels. If you haven’t got a Watchlist, there’s no better time to create one. But remember that your valuations and analysis should be done while you’re calm and objective, not under the duress of a sharp downturn or giddiness of a rising market. “

Avoid fads and invest for the long-term

Roger Montgomery

“If you haven’t gone for fads, or companies that may or may not ever make a profit, then you should look forward to lower prices, and take advantage of them when they eventuate.

Many investors, especially those approaching retirement believe they need to invest with the day of retirement in mind. This is a mistake. Even if you are retiring today, you potentially have 30 years of living to fund and so you will be a net buyer of stocks. Knowing that you will be a net buyer means you want lower prices in the future, particularly for those stocks you don’t already own.”

Tune out the noise

Hugh Dive

“I will go for a walk to get away from the noise. I'll take a copy of the portfolio and methodically go through each holding. I also like to keep an aquarium in both my home and Martin Place offices that provide a calming influence during market downturns.

When you’re staring into the face of a crash, the worst thing that you can do is look at the sea of red on your computer screen for hours at a time reading the breathless market commentary in the financial press or coming out of the trading desks at the investment banks. The former is designed to sell newspapers and the latter is done to try and influence you to incur brokerage.”

Focus on the downside

Hugh Dive

“In the current environment we see that investors should be looking through their portfolios for the stocks that could “torpedo” portfolio performance. In early 2018 rather than scouring the market for the next Blackmores or A2M Milk, we are spending time thinking about what could go wrong with the various companies in our existing portfolios. As a quality style manager, I am now looking closely at the quality of company earnings and the percentage of earnings that are derived from recurring earnings that will hold up over time, rather than profits coming from revaluations, asset sales or performance fees.”

Never forget quality

Roger Montgomery

“Always focus on quality; those companies with high rates of return on equity, little or no debt, bright prospects for margins and unit sales volume and management with a solid track record. Pleasingly, quality companies have endured the recent market weakness better than many of the ‘concept’ or ‘themed’ stocks with underlying businesses only hopeful of generating profits or revenues in the future.”

‘All weather’ stocks

When a correction or crash occurs, few companies’ shares prices are spared. But while share prices may fall, for some companies, their underlying business can be unaffected or even benefit.

Roger Montgomery

“There are few true ‘all weather’ companies in the world simply because legislation or technology can always change in favour of a competing alternative. One of the few that comes close is French company Essilor. The company enjoys a 40% global market share in the manufacture and distribution of corrective eyewear. With 70% of people over the age of 40 years, and 90% of people over the age of 70 years, requiring corrective eyewear, the current market of over 4 billion people is growing daily. That’s about the longest growth runway I can think of, and the company generates excellent economics.”

Hugh Dive

“While listed property trusts as a sector viewed with suspicion by many investors, we continue to like SCA Property. This trust is exposed to domestic food, liquor and services consumption via long-term leases to Woolworths. During major market meltdowns such as the GFC, consumers cut back spending on discretionary items such as clothes and going out to restaurants in favour of cooking and drinking (larger than normal) glasses of shiraz at home; all of which are supportive for SCA Property’s earnings.”

Nathan Bell

“Liberty LiLAC recently spun off from former parent Liberty Global, whose market value is about ten times the ~$4bn market value of LiLAC. LiLAC’s share price is roughly half what the company was being valued at two years ago, as the company admitted it paid too much for an acquisition and recent operating results have been hurt by increased competition in one of its major markets.

Liberty LiLAC is the South American outpost of John Malone’s cable TV and internet empire. LiLAC occupies the number one or two market position in its markets, such as Chile, where regulation encourages companies to invest in faster internet speeds for the long term.

Not having fast and reliable internet speeds puts any country at a competitive disadvantage, and for countries with small public budgets it makes sense to encourage the private sector to provide those services.

Internet usage in countries where LiLAC operates is often at half the levels experienced by developed nations, showing there’s a long runway for growth. LiLAC also expects to make acquisitions and increase its market position over time.”

Further reading

There have been plenty of great articles published on Livewire this week about the correction. Here are a few of the best ones:

  1. Anton Tagliaferro, Investors Mutual: “My thoughts on the recent Wall Street correction
  2. Craig James, CommSec: “Market correction – what does it all mean?
  3. Gareth Brown, Forager Funds: “Why even small panics matter
  4. Romano Sala-Tenna, Katana Asset Management: “Stairs up, elevator down
  5. Jack Lowenstein, Morphic Asset Management: “Sometimes the safest thing to do is nothing

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