Rudyard Kipling’s poem, If, opens with the immortal line:
“If you can keep your head when all about you are losing theirs and blaming it on you…”
It’s a great line for investors trying to keep their head above water in a period of market turbulence. But it’s easier to say than do.
Be like Buffett
We all know the stories of great contrarian investors who bought stocks when everyone else was fleeing the market. Investors who, to use Baron Rothschild’s famous line, knew that “the time to make money is when blood is running in the streets.”
One of the most famous examples is Warren Buffett’s purchase of a major stake in investment bank Goldman Sachs at the height of the GFC – when major banks all over the world were deep in trouble. Some estimate that Buffett made over US$3 billion on that single investment.
Yet while we all understand the logic of buying when prices are low, it’s very difficult for us to make that move when the media, our gut and our friends are all urging us to be cautious.
Look at the trajectory, not the price
According to Perpetual’s Garry Laurence, Portfolio Manager of the Perpetual Global Share Fund, one of the secrets to investing when markets are falling is to understand the difference between price moves and earnings trajectory.
“Even when there is fear in the market and stock prices are falling we are confident enough to buy because we seek companies whose earnings trajectory is strong and positive, who have good free cashflow and strong balance sheets,” he says.
If you invest in companies with those characteristics, buying when prices are falling means you’re getting your share of those earnings at a discount.
Secular shift or short-term sentiment?
For individual investors, one of the most testing decisions about buying low in the hope of selling high is to distinguish between a company whose share price has been hit by bad short-term news, and one that is under genuine threat from a shift in the business landscape.
How does an individual investor distinguish between:
- Qantas – challenged in the short-term by high fuel prices and a weak global economy but able to ride out those storms.
- US bookstore Borders, which went bankrupt in 2006 – at least partly due to the arrival of on-line bookseller Amazon.
Garry Laurence says that secular shifts rarely happen overnight (book buyers didn’t wake up one day and decide only to buy online). He says the key is to keep a constant eye on industry dynamics, separate short-term factors from long-term trends and to constantly analyse the actions of different competitors within a sector.
Perhaps most importantly, he looks at whether the trend – positive or negative - is showing up in the real world where it really matters – on the bottom line.
For more of Garry’s global share insights, sign up for his email newsletter below. Or visit the Global Share Fund page.
This article and accompanying video has been prepared by Perpetual Investment Management Limited (PIML) ABN 18 000 866 535, AFSL 234426. It is general information and is not intended to provide you with financial advice. The views expressed in the video are the opinions of the author at the time of recording and do not constitute a recommendation to act. Any information referenced in the video or article is believed to be accurate at the time of compilation and is provided by Perpetual in good faith. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.