The current market has two key factors that are creating fear amongst traders and investors: volatility coupled with weakness, and virtually an entire market that is being hit.
We’ve certainly kicked off the first month of the year with a bang (albeit a downward one) and little suggests we’ll see a positive year for the Top40 index, even though markets have recovered some of their earlier losses as I write this.
So the question everybody is asking is whether this is 2008 all over again. Some have stated that 2016 certainly feels very much like 2008.
I disagree. There were a few very important elements in 2008 that aren’t present right now. Firstly, 2007 had been a very positive year with almost everybody trumpeting another great year ahead.
We’d started to see some wobbles in global and local markets towards the end of 2007, but overall we found ourselves in a very positive environment. This wasn’t the case in 2015, especially in South Africa.
Over and above this, the pain in markets is different because it’s being led by emerging markets due to the commodity collapse. Back in 2008 emerging markets were led lower by the banking troubles in developed markets.
Lastly, in 2007 we ended the year on very high valuations whereas we ended 2015 with generally modest valuations. Sure, we had pockets of high values, especially in some industrials and a few retailers.
So while things look messy, this is not 2008. Importantly, that does not mean we won’t see a sell-off.
With this in mind we come back to the question of what a long-term investor should do. The answer is simple: mostly nothing.
As always, forget about selling core long-term holdings of awesome stocks. You have missed the boat of the highs, something I always say we’ll do. Also, selling assumes you’ll buy at the bottom when you didn’t sell at the top. Why do you now think you’ll recognise the bottom and buy?
That said, second-tier stocks and ones you’re not sure about should certainly be sold – this is a process one should follow regularly, using any upside to sell into.
Have a hard look at your portfolio and exit any stocks that you’re not certain about, keeping just that core of awesomeness.
Then look for opportunities. If markets are moving lower, it’s as good as having a sale on the JSE and unless we think the end of the world is coming, prices will recover and these bargains will look great in the years ahead.
There is a core of awesome stocks that I am looking to buy more of and I have bids in the market at lower levels. If these bids are hit I will be a happy buyer, even if the stocks continue to fall. I have a lot of cash after having sold off my second-tier stocks when the finance minister drama unfolded last December.
I have bids in the market for Richemont* starting at 9800c and moving down to 8500c. Will it hit even 9800c, never mind 8500c? I have no idea but I am happy if it does.
The initial top bids are close as I write this, but I run these bids down some way so if the sell-off gathers speed I will be buying more and more as it falls.
If my initial top-level bids get hit and continue to fall, that’s fine. I have no idea how low a stock will go, but I do know what price I would like to buy at.
*The writer owns shares in Richemont.
This article originally appeared in the 11 February 2016 edition of finweek. Buy and download the magazine here.