Why even small panics matter

Sitting in a pub with property man Pete Wargent a few months ago, we were discussing the property market of Sydney in the 2008-10 ‘downturn’. I use inverted commas because barely a blip registered on any city-wide measurement of house prices.

But according to Pete, such indices didn’t register the depth of panic selling/forced liquidation going on in some pockets of the market. He and his clients were placing low-ball bids on properties for sale and were often successful. Things happen when you’re the only bidder and the seller is keen.

An amplified version of this happens in the stockmarket. Old salts will know this lesson but it never hurts to be reminded – stocks aren’t indices. And so while we’ve seen some light panic emerge in the indices in recent days, I don’t open my watch list each morning and see a consistent sea of red. A few stocks are up, a lot are down a little, some are down a lot.

Averages obfuscate

Judging by twitter (which, of course, one should never do), there are two predominant responses to the recent return of mild jitters. Some think it’s a very big deal. Others think ‘down 4%? Calm down, we’re barely back to last Tuesday’s prices’. Forager staff, and most readers of this blog, will naturally fall into the latter camp.

But don’t use that as an excuse to be lazy, there’s work to do here. The indices don’t really tell us much, other than that sentiment has shifted.

Last month, Steve, new recruit Chloe Stokes and I spent many hours studying an unnamed part of the UK economy. The stocks in this sector appear really cheap in a historical context. But they’re also facing a demand side cliff over the next few years which will impact revenues and likely cause some margin erosion. So these stocks might get cheaper still and stay that way for a few years. We’re going to keep a close eye on the sector and have lined up a few management meetings for an upcoming trip to the UK. But we decided to park the idea after a few weeks’ work.

Most stocks on our watch list in that sector are off 15% or more over the past few days. They’re not in our portfolio yet, but that’s a meaningful shift towards a more compelling opportunity. The magnitude of this industry-specific downturn isn’t evident in the indices. But sure enough, it’s the return of fear that has delivered those lower prices.

Illiquid opportunities

Elsewhere, we own shares in an illiquid stock that is currently liquidating its portfolio of assets and will soon start returning cash to shareholders. It’s made some positive announcements in recent months regarding asset sales and is generally running ahead of our expectations.

It made another positive announcement last night. We think the price should be up. But rather it’s down a little. And, more importantly, sellers are hitting our bid and we’re able to pick up more shares in the current environment.

This stock doesn’t appear in any important index. And if it did, there’s no significant price deterioration to speak of. But important pieces of news and a flat share price can turn a good buy into a great one. Again, it’s the return of fear (even a little) that’s making this possible.

We don’t ‘time’ markets. But we’ve been holding a lot of cash in recent months. In the International Fund, it was more than 30% as recently as November and 27% at year end. Cash dipped to 20% a few weeks ago after we invested in several attractive new opportunities. After last night, it’s below 18%. Expect more cash to be put to work if this panic intensifies.


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Gareth Brown
Portfolio Manager

Gareth Brown is a Portfolio Manager at Forager Funds Management, with a focus on researching European stocks for the Forager International Shares Fund.

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