Hello,
Has been a while, but life has been busy. Moved house, started a PhD and renovated said house. While I stopped on the writing side I got more serious on the investing side. However its not really about how I did (+-630%), its about what you can take away and learn form it.
At a time when things fall apart it is in my view the most important time to understand human behaviour. I think the word that could be used to describe the market in March would be PANIC.
When things are falling it is difficult to buy (partly because panic seems to be contagious), because when is the bottom? I talk a bit about this is “The hardest thing is patience” blog.
There is a fairly commonly known statement:
Buy when everyone else is selling, and hold until everyone else is buying. That’s not just a catchy slogan. It’s the very essence of successful investing. J.P Getty
The first half at least is the important bit, in a crisis everyone is selling. Which gives you an opportunity to buy. At the same time you can’t just be buying anything, what I would say was key was looking at quality companies that aren’t going to go bankrupt (That is key). If you got more risk apatite and can put a small amount into the ones on the edge it could be worth it. I was driving to a work lunch just before lockdown in March. Sasol ( previous $20bn dollar company, now $10bn company that was $0.2bn) had plummeted 90% plus at the time, and I said to Richard driving with me, you need to consider why. People are either pricing it as bankrupt, or expecting a rights issue. It wasn’t just the crisis to be fair, CEO’s messed up on budgeting a huge project, debt was high, oil plummeted etc. However are they really gonna go bankrupt? Look at the assets, if you normalise, all you need to know is if this company won’t go bankupt, so why not put a small amount in (obviously you not going to put 10% of your portfolio in a borderline company), but putting 1/2% in something that would normalise to 10x as much makes more sense. So Richard gave it some thought bought and got at least 5x his money (not sure if he sold of not). There are hundreds of companies world wide that crashed, normally not as extreme as Sasol, but offer solid returns on a normalised basis that you could get as a bargain.
Second thing to learn is one needs to take a step back and look forward and look around. Where I put most of my money was REITS (which if you asked any analyst they would have said you’re an idiot. Brief exaggerated version of most responses I got: Everything is going online, the worlds working remotely and why would you invest in a dying industry.) My response is 635%…..
Short version, well explained by Kyle using a simple example. Let’s say you want to go buy a commercial building (now 1 year after covid), when REITS are still half price. In cape town, you’ll shop around get a property on a 8-10% yield, the bank will lend you money at prime with a 30% deposit. So they saying your average Joe, with no diversification would accept an 8-10% yield on a “not prime” property. Then you look at the listed REITS, which own Prime property, with 40% plus deposit, global diversified portfolio’s and the market pricing them on a 20% yield (current not even forward -like pricing no recovery ever!) Does that make any sense?
Secondly logically consideration, yes online shopping is huge in developed markets, but in emerging markets it is not the same. Also are you telling me you never want to go look at a product at a shop? Just go to a shopping center and see are people there, if they are the shopping center is still relevant.
The above said not all REITS are equal, need to know your company.
Timing the market! First note this is basically impossible (would be luck), so in a crashing market you obviously wait a while, until its cheap, then wait because the market overreacts, then start buying (I didn’t just go all in when I though it was the bottom, as I don’t know where the bottom is), so I would buy tranches of a share I like, and if it goes down, more, down more, and as it comes up right size my position (sell off some). Again as I point out in the last post on patience need to be sure about your share. This is very difficult to do, one the buying, two the holding and three then selling. I will be honest I made a few mistakes. I sold Sasol so early and didn’t make money (because I had bought it before the crash, then it tanked 90% then I bought some more and sold at break even , half way up. Even though I told Rich he should hold, because it got to me. I didn’t want a big investment in something borderline.
If you not going to pick stocks, like my brother in law (he is a sports director), buy a stock index, and just buy in a bit every week from April. If you not sure where to invest an index or fund is a safer option, as long as you don’t put it all in at once.
Capital structure. So during the crisis firms with the highest debt seem to get hammered (I haven’t done the analysis yet, but I will do it as part of my PhD - which is on capital structure). In theory capital structure is simple, borrow as much money as you can without putting yourself in financial distress (with some other theories for flexibility), so lower your cost of investment. I think the drop was mainly due to what happening in the 2008 crisis, people were prepared (well at least they thought so), so they took it out on leveraged firms. Now I live and invest in SA (my global stocks are small and insignificant), SA according to research is considered under-levered, people would say companies here are conservative with leverage. Our banks basically being a oligopoly make the debt market so inefficient and ineffective that our companies are unlikely to get more debt than they can handle, and perpetuates the inefficient capital structure. So if you just looked rationally at those companies it was easy to see tons of value. Also what happened to interest rates? They basically plummet world round, and then everyone printed money. Stand alone if they dropped rates and printed money you would want a company to have more debt, as inflation will kick in and your WACC goes down and you become more profitable (provided you don’t go bankrupt). So is actually a win to be leveraged, so they bounced back strong.
We live and we learn, and that’s why you need time in the market, and you need to understand behaviour to see the opportunities. So take a step back and try be rational while everyone screams panic!