As I write, a mid-afternoon storm is bearing down on our home town of Brisbane. It’s a little unusual for this time of year. The Bureau of Meteorology have issued a storm warning. It might be bad. Or it might pass quickly. But they don’t really know. Of course it doesn’t stop them issuing a forecast, but we all know that it is just that – a forecast. And it might be right or wrong. In fact we often joke about how bad the weather service are at forecasting. Actually, they’re significantly better at it than economists!
I have read a lot of expert commentary recently. It is mostly interesting, but almost all unhelpful for making investment decisions. Some experts say this is a dip and you should invest aggressively. Others that it is the start of a much bigger correction. Much of it is written by people I have enormous respect for. But the guy who says the ASX index will be over 6,000 by Christmas and the guy who says we will be going back to the lows of 1932 (good grief!) can’t both be right.
I’ll let you into a secret. No-one really knows. And if you invest based on such short term thinking, you will be wrong about half the time. Plus you’ll worry a lot about whether you’ve got it right or wrong. And you will worry unnecessarily about half the time. It doesn’t mean here at Affluence we don’t read this stuff. We do. We read commentary from a large but hand-picked group of those whose opinions we respect. We look at technical indicators. We subscribe to economic forecasts. But we don’t use them to make investment decisions alone. Rather we use such information as a source of ideas. We look for exceptional situations. Perhaps things that happen rarely, which could be an indicator of market turning points. Or things that have repeated reliably a number of times in the past. These things can be a useful guide, but are almost never 100% reliable by themselves.
Right now, the stock market is down over 3%. For the day. That’s a pretty big fall. It wasn’t until about lunchtime that I wondered what had caused it. Turns out it might have been China. Or something the Fed said in the US overnight. Or the thought of interest rates rising in the US. Or technical traders who believe we need to fall below the August 24 low before we can go up again in a sustainable way.
I have no idea whether it was actually any of these things that caused it, or all of them. But I do think it’s a good day to put some money to work. So we did. If the market rises tomorrow we’ll feel happy about our decision. If it falls further, we might buy some more. Either way, we won’t worry too much.
It’s hard to buy on days like these. But that’s what makes it worthwhile. In making a decision whether to buy or not, and how much to buy, we look at 4 things:
- Where is the market now, compared to our assessment of fair value;
- Where is the market compared to LONG TERM averages;
- How much cash do we have to put to work; and
- How much cash are we happy to retain in case we get a better opportunity.
With regards to valuations, today, the ASX200 index has hit a 2 year low. Sounds like a pretty good time to us to be putting at least some money to work, particularly given that company profits haven’t exactly fallen in that two year period. So, simplistically, you get the same profits (and dividends) today, for less than you would have paid at any time in the past 2 years.
On days like these, we just keep plodding along doing what makes sense to us:
- Invest when we see value, using cash set aside for just such an occasion;
- Investing in funds run by managers who have a proven ability to smell a bargain – and to outperform average over long periods; and
- Remaining diversified in such a way that means we will be comfortable with our decision regardless of what happens tomorrow, next week or next month.
Want to know what we bought? We invested in a small number of listed investment companies (LIC’s) that we had been watching for a while. Those run by exceptional managers that also meet our value criteria. Which means they are trading below net asset value. How far below net asset value do we seek to buy? Well that depends on a number of factors. They include, among other things, the size of the LIC, what it invests in, whether it has any options on issue, how it has traded historically and the discount to net asset value. We’ll be writing more about how we choose these LIC’s soon. Stay tuned or register on our website to learn more.
And by the way, good luck out there. There’s a bit on sale this week. Seems like a good time to at least do a little bit of shopping.