At a high level, that\u2019s about it. <\/p>\n\n\n\n
To be clear, I’m not suggesting that this is what you should do. But it works for me.<\/p>\n\n\n\n
Of course, this strategy hasn\u2019t helped me avoid the havoc wrought by the coronavirus. My portfolio is well down from where it was in January. It sucks.<\/p>\n\n\n\n
That being said, I have little concern as to whether most of my companies will be able to endure the huge economic dislocation most experts are anticipating. Their earnings will all be hit, some worse than others, but I expect them to be around — and prospering — a few years down the track.<\/p>\n\n\n\n
I\u2019m fortunate, too, in that I entered into this crisis with a fairly large cash weighting (proportionally speaking). Again, that wasn\u2019t due to any great precience on my part, but rather a reflection of the fact that over the past year or two I was finding it increasingly difficult to justify many of my holdings, especially as some big winners came to dominate the weightings. Although I still liked most of these companies, their market valuations were becoming very unrealistic in my view (eg ProMedicus).<\/p>\n\n\n\n
A good problem to have, to be sure, but combined with a lack of high conviction ideas I just ended up with a large cash weighting.<\/p>\n\n\n\n
Although that sounds very fortuitous, I\u2019m not bragging. The reality is that this meant I had far less exposure to the market when it was surging ahead last year. Losses are painful, but there\u2019s a special kind of pain that comes from watching sold shares continue to rally.<\/p>\n\n\n\n
Frankly, despite the recent falls, I’d probably be much better off today if I was less hasty in my selling.<\/p>\n\n\n\n
At any rate, timing is simply not a feature of my strategy (I just can\u2019t do it and, frankly, I don\u2019t think most others can either). I know I\u2019ll often buy too early and sell too late (or vise versa), but that doesn\u2019t matter. As far as I am concerned, real wealth creation is not about deftly trading in and out of markets; it\u2019s about owning attractive assets that can deliver long-term, compounding returns.<\/p>\n\n\n\n
Which brings us back to the current situation. <\/p>\n\n\n\n
What\u2019s changed<\/strong>?<\/h3>\n\n\n\nAs I said, my strategy has not changed. But the environment sure has.<\/p>\n\n\n\n
The opportunity set has grown much larger and, while extremely sensitive to the very real and significant social and economic impacts the coronavirus will bring, I\u2019m very mindful of Winston Churchill\u2019s aphorism: never let a good crisis go to waste<\/em>.<\/p>\n\n\n\nIf I\u2019m genuine in my long-term horizon and agnosticism towards timing, there\u2019s a good argument to start putting my cash to work immediately. There\u2019s more than a few interesting prospects out there right now that are trading at attractive prices — even if they do go a lot lower in the interim.<\/p>\n\n\n\n
Consider this; if you\u2019d purchased shares in Flight Centre (ASX:FLT) after they\u2019d already fallen 50% in the GFC, you would have had to endure a further 70% loss and wait many years before your investment bore any real fruit. But that was some sweet and juicy fruit — by 2014 your investment would have delivered a market thrashing 194% total return over the period.<\/p>\n\n\n\n
(Let me stress: I\u2019m not trying to draw any parallels with what happened to Flight Centre then with what might happen now. The situations are very different, and I\u2019m not buying at present. It\u2019s just to illustrate the point that your timing can totally suck, but if you buy the right stock and have enough patience, you can still do extremely well.) <\/p>\n\n\n\n
Still, although I may eventually<\/em> be happy in buying now, if I am being honest, there\u2019s an inner hubris that makes me think now is not the time to act. Things could get worse, and stay worse, for a long time.<\/p>\n\n\n\nIn another article<\/a> I suggested the smart way to handle this dilemma was to divide your investable capital into five discrete chunks and commit to putting each to work at regular intervals over the coming year. I still think that\u2019s the lowest risk way to \u2018play\u2019 this, as although you\u2019ll still miss the bottom, you\u2019ll likely get a very decent average. <\/p>\n\n\n\nBack to our Flight Centre example. If you\u2019d employed a dollar cost averaging strategy as shares really began to fall you would have achieved a better average buy price and, consequently, a much higher total return. <\/p>\n\n\n\n
![\"\"\/](\"https:\/\/lh4.googleusercontent.com\/eM-iJBph7_cV8pt6LW9YRQCXp9qK5UhTPxU2WpD1sUKlUJpvJo75qqsGlKHKLOdJFotU-MQUM9F_UUIhpwBaisvdqm_KKJHZe4fwyK3l7LP4ZBhQ6vZlYR4QEKcSdpKLfqCgFcqx\")
Flight Centre example. Scenario 1: purchase shares after a 50% fall from peak. Scenario 2: dollar cost average over the period.<\/figcaption><\/figure><\/div>\n\n\n\nIt\u2019s worth noting that in this example, three out of the five purchases were at a worse <\/em>price than under the first assumption. It\u2019s just that at the lower prices, you get a lot more shares for the same dollar investment. <\/p>\n\n\n\nThat\u2019s why dollar cost averaging works so well.<\/p>\n\n\n\n
Also note that even at the best purchase price, shares still dropped a further 30% before they bottomed out. Today that feels very abstract, but that would have been a brutal period to endure psychologically. At the bear market nadir, you would be sitting on a 67% loss, with all your ammunition spent. Not a happy place. <\/p>\n\n\n\n
Again, this is all just to illustrate a point. I could have used any number of different companies to draw the same basic lesson (provided they returned to growth after the GFC, which reinforces the importance of also focusing on quality).<\/p>\n\n\n\n
So anyway, that\u2019s basically how I intend to operate over the next 12 months. You can visit my Strawman profile<\/a> if you want to follow along. When the new version is finally released (soon, I promise!), you\u2019ll be able to see the exact weightings and cash balance. <\/p>\n\n\n\nWhen it comes to my shares, there\u2019s a lot of work to do in testing previous assumptions and potentially re-examining valuations. But that\u2019s not the hardest part. <\/p>\n\n\n\n
The real test will be one of patience and emotional fortitude.<\/p>\n\n\n\n
The near-term outlook <\/strong><\/h3>\n\n\n\nLike I say, I don\u2019t have any clear view as to how the market will play out over the coming 12 months. But, for better or worse, I want to lay out my current thinking in terms of the big picture. <\/p>\n\n\n\n
Needless to say, in such a rapidly changing environment this could well prove laughable when we look back in a year or two. Maybe even next week. But I think it\u2019s important to keep an investment diary to properly keep track of your thoughts. As always, I\u2019ll continue to update my thinking as and when new information comes to light, or if I find a better interpretation of the known facts.<\/p>\n\n\n\n
Based on everything I\u2019ve been reading, here\u2019s my take: <\/p>\n\n\n\n
- If they haven’t already, most countries will need to enact strict travel and social distancing policies. Even if introduced quickly and effectively, this will have a massive impact on the real economy.<\/li>
- For several economically important countries, the response to date has been woefully inadequate. However, things could still improve significantly if efforts are improved. <\/li>
- The pandemic could last for at least 6 months. Maybe 12 months. After that, most of the population will have acquired and recovered from the virus, and remaining pockets of infection will be effectively dealt with. Strict control policies will start to be relaxed.<\/li>
- In the meantime, although exact infection, admission and mortality rates can be debated, the social cost will be significant and tragic.<\/li>
- It will likely place health systems under an incredible strain. Many places will reach breaking point.<\/li>
- A recession seems inevitable, as does a rise in unemployment.<\/li>
- Over the coming months businesses and households will be severely tested. Of those that do emerge, many will do so in a much weaker position. <\/li>
- We are entering this crisis with record household debt and an inflated property market.<\/li>
- Once the medical crisis begins to subside — and it will — there\u2019s no guarantee of a rapid economic rebound. <\/li>
- Governments around the world will introduce significant stimulus packages.<\/li>
- The same issues that helped drive markets higher after the GFC — loads of liquidity, near zero rates and fiscal stimulus — are still a factor.<\/li>
- Markets are always looking forwards. I suspect once there\u2019s any glimmer of light at the end of the tunnel, the \u201cfear discount\u201d could quickly dry up, even though a return to previous highs could take many years.<\/li><\/ul>\n\n\n\n
And, of course, any number of unpredictable events could still come out of left field and turn everything upside down again.<\/p>\n\n\n\n
If you have a different perspective, overall or just in part, please share it on our forums<\/a>. As Ray Dalio says, I just want to be right\u2014I don’t care if the right answer comes from me.<\/em>
<\/p>\n\n\n\nStay safe, and good luck to all.
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Strawman is Australia’s premier online investment club. Join for free to access independent & actionable recommendations from proven private investors.<\/em>
<\/p>\n\n\n\n
If I\u2019m genuine in my long-term horizon and agnosticism towards timing, there\u2019s a good argument to start putting my cash to work immediately. There\u2019s more than a few interesting prospects out there right now that are trading at attractive prices — even if they do go a lot lower in the interim.<\/p>\n\n\n\n
Consider this; if you\u2019d purchased shares in Flight Centre (ASX:FLT) after they\u2019d already fallen 50% in the GFC, you would have had to endure a further 70% loss and wait many years before your investment bore any real fruit. But that was some sweet and juicy fruit — by 2014 your investment would have delivered a market thrashing 194% total return over the period.<\/p>\n\n\n\n
(Let me stress: I\u2019m not trying to draw any parallels with what happened to Flight Centre then with what might happen now. The situations are very different, and I\u2019m not buying at present. It\u2019s just to illustrate the point that your timing can totally suck, but if you buy the right stock and have enough patience, you can still do extremely well.) <\/p>\n\n\n\n
Still, although I may eventually<\/em> be happy in buying now, if I am being honest, there\u2019s an inner hubris that makes me think now is not the time to act. Things could get worse, and stay worse, for a long time.<\/p>\n\n\n\n In another article<\/a> I suggested the smart way to handle this dilemma was to divide your investable capital into five discrete chunks and commit to putting each to work at regular intervals over the coming year. I still think that\u2019s the lowest risk way to \u2018play\u2019 this, as although you\u2019ll still miss the bottom, you\u2019ll likely get a very decent average. <\/p>\n\n\n\n Back to our Flight Centre example. If you\u2019d employed a dollar cost averaging strategy as shares really began to fall you would have achieved a better average buy price and, consequently, a much higher total return. <\/p>\n\n\n\n It\u2019s worth noting that in this example, three out of the five purchases were at a worse <\/em>price than under the first assumption. It\u2019s just that at the lower prices, you get a lot more shares for the same dollar investment. <\/p>\n\n\n\n That\u2019s why dollar cost averaging works so well.<\/p>\n\n\n\n Also note that even at the best purchase price, shares still dropped a further 30% before they bottomed out. Today that feels very abstract, but that would have been a brutal period to endure psychologically. At the bear market nadir, you would be sitting on a 67% loss, with all your ammunition spent. Not a happy place. <\/p>\n\n\n\n Again, this is all just to illustrate a point. I could have used any number of different companies to draw the same basic lesson (provided they returned to growth after the GFC, which reinforces the importance of also focusing on quality).<\/p>\n\n\n\n So anyway, that\u2019s basically how I intend to operate over the next 12 months. You can visit my Strawman profile<\/a> if you want to follow along. When the new version is finally released (soon, I promise!), you\u2019ll be able to see the exact weightings and cash balance. <\/p>\n\n\n\n When it comes to my shares, there\u2019s a lot of work to do in testing previous assumptions and potentially re-examining valuations. But that\u2019s not the hardest part. <\/p>\n\n\n\n The real test will be one of patience and emotional fortitude.<\/p>\n\n\n\n Like I say, I don\u2019t have any clear view as to how the market will play out over the coming 12 months. But, for better or worse, I want to lay out my current thinking in terms of the big picture. <\/p>\n\n\n\n Needless to say, in such a rapidly changing environment this could well prove laughable when we look back in a year or two. Maybe even next week. But I think it\u2019s important to keep an investment diary to properly keep track of your thoughts. As always, I\u2019ll continue to update my thinking as and when new information comes to light, or if I find a better interpretation of the known facts.<\/p>\n\n\n\n Based on everything I\u2019ve been reading, here\u2019s my take: <\/p>\n\n\n\n And, of course, any number of unpredictable events could still come out of left field and turn everything upside down again.<\/p>\n\n\n\n If you have a different perspective, overall or just in part, please share it on our forums<\/a>. As Ray Dalio says, I just want to be right\u2014I don’t care if the right answer comes from me.<\/em> Stay safe, and good luck to all. <\/p>\n\n\n\n Strawman is Australia’s premier online investment club. Join for free to access independent & actionable recommendations from proven private investors.<\/em>The near-term outlook <\/strong><\/h3>\n\n\n\n
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