Markets just dropped unexpectedly and … (Covid-19 Update #6)

13th March 2020

The chart on the left shows the movement of the Dow Jones industrial average (the American share market) from 12 months ago.  The chart on the right shows the Dow Jones industrial average movement over the last five years.

 … more value suddenly emerged!

It is one thing to sit in the comfort of your home or an office and discuss the theory of prices bobbing up and down.  For some, it is quite another thing when it actually happens! 

Because of our value/eBiz Investing driven approach, our experience at WISEplanning with our clients and how they respond to this type of event is not typical among the financial advisory community as a whole.

So far, at WISEplanning, we have had one client e-mail in, concerned about the volatility and the decline in the cash up value of their portfolio, one client at the opposite end of the spectrum, having cashed up their portfolio specifically so they could go back in again when prices are lower (so far, this actually is looking quite good) and all of our other clients are sitting tight and if I may say so, behaving like business owners and being mature. 

I hasten to add the clients that were concerned and the other client who cashed up his portfolio are not being immature. 

The Investors (‘Litmus’) Test

The ‘litmus test’, so to speak, for investors, is whether or not you, as an investor, see declining prices as losses or whether you see it as the opportunity for better buying. 

Where do you sit? 

Obviously, if you are lamenting the decline in the cash up value and adding up how much money you now no longer have if you were to cash your portfolio up, then you are in the camp with those who play the share market. 

On the other hand, if you are ambivalent about the cash up value rising and falling and see lower prices as opportunity rather than losses, then you are more like a business owner.

But, why did markets ‘crash’ … unexpectedly … yet again?!

Actually, I use that emotive language ( ‘crash’ ) because that is me being slightly sarcastic around the type of emotive language that the popular media uses with their ‘click bait headlines’. 

The market has no plan or strategy and pretty much reacts to what is going on right in front of it. 

The latest decline in trading prices was triggered by Donald Trump announcing the travel ban between Europe and the US, although strangely not including the UK.  Does that mean someone can fly (or drive or take a bus or a ferry) across to England and then fly to the US? 

Anyway, my client who cashed up his portfolio, because he was concerned that Donald Trump was not listening to his advisers and would inevitably cause some sort of an event, is looking very much on point right now!

Does it matter?

The better question is not so much ‘why’, although it is interesting to know why, but rather what is the impact and does it matter? 

It does matter but in a good way because the value is emerging.  To be clear, it does not matter because the cash up value of our investment portfolios has dropped.

You know the reason why and that is because price and value are different things.

What we have had for several years is trading prices floating well above the ability of the markets to generate real profits.  Still we have made money over that time even when taking into account that we are giving some of those gains back at the moment.

We will be taking back those recently given up gains in the future – for sure.  It is just a matter of time (although we may need to be patient). 

Better still, because we gave up those recent gains (we appear to be right in the midst of it), by increasing our ownership of good businesses (averaging down or topping up) we have the opportunity to build in an improved ROI long term by taking advantage of lower prices now.  

Markets have been expensive.

That is why I have been repeatedly going on about levels of cash over the last few years and repeatedly stating the same old story about prices being expensive, just because they were.  Nothing too clever there.

Right now, however, whilst some prices still remain expensive, they are not as expensive as they were. In this category, the likes of Alibaba, Apple and Amazon come to mind; however, overall, trading prices are now more aligned with the market’s ability to use capital and generate profit.  That is why I make the comment about investing into declining and stabilising prices is the approach for us. 

We are usually either a bit early or a bit late but by investing into declining and stabilising prices, we are not far off somewhere near the bottom of the trough and longer term, that represents good positioning. 

The above two charts show Alphabet’s trading price movement over 12 months (the red chart on the left) and over five years (the green chart on the right).

Although admittedly, the trading price tells you pretty much nothing about the business from a trading price point of view, however, it is interesting when you step back and get some perspective away from the noise of what is going on right now (the red chart vs the green chart). 

Of course, historical trading price movement and returns are no guarantee of what is coming in the future.  That is why we are business owners rather than people who play the share market. 

Our focus is on the fundamentals (e.g. the economics of the business) and what drives investment performance, as distinct from the superficial trading prices, which only report market sentiment.  

“We simply attempt to be fearful when others are greedy and to be greedy when others are fearful.”

                                                                                                                                      Warren Buffett