November 2023
The current state of the markets represents a perfect storm for massive overselling of stocks with underlying issues. It’s not merely a case of the glass being half empty; rather, it’s as if the glass is completely empty and shattered into pieces. This environment is fertile ground for those who engage in deramping and short selling, and they are capitalizing on it, leading to a significant overselling of stocks.
Rebounding from Panic: The Resilience of Stock Markets
During such times, funds find themselves compelled to sell due to the deteriorating market conditions and the impact on their financial metrics, which, in turn, exacerbates the existing problem. In a bear market, panic becomes the dominant sentiment. However, once the initial panic subsides, bargain hunters enter the scene, and short sellers become increasingly nervous, often resulting in substantial rebounds in stock prices.
I guess that’s the frustrating thing about value shares. Things can go down and down and you never know where the bottom is. A lot of the time being early is indistinguishable from being wrong.
One of the inherent frustrations associated with value shares is the uncertainty of how far they can decline. They can keep descending without a clear bottom in sight, making it challenging to determine when to act. Oftentimes, being early in investing can be indistinguishable from being incorrect in one’s assessment.
In an effort to mitigate potential risks, I have taken significant hedging measures, allocating 40% of my portfolio into cash. Even prominent financial institutions, such as my bank, avoid exceeding a 10% cash position in their discretionary portfolios. The Chief Investment Officer (CIO) himself concedes that, in most cases, he lacks the insight to predict the next moves in the markets. This admission comes from over four decades of experience in the industry and ascending to a prominent position within one of the world’s most respected wealth management firms. It raises questions about the predictability of financial markets, reminding us that no one – not you, me, John Authers, Warren Buffett, Jay Powell, or even the yield curve – possesses the ability to definitively forecast whether we are headed into a recession. Moreover, if a recession is looming, it’s uncertain whether the markets have already priced in that probability or if they are on the brink of focusing on a recovery.
In your current position, a more substantial concern might be the possibility of misinterpreting a bullish resurgence as a bearish bounce, potentially leaving you stranded. It’s important to acknowledge that this bear market has been ongoing for two years. If your apprehension is that a recession could adversely affect your company’s profits, it may be wise to consider investments in more robust enterprises.
Diversification: The Key to Long-Term Investment Success
The single piece of advice I can offer is to avoid going “all in.” Nothing in life is certain except for death and taxes. The mentality of “if only I had put my every last penny into Amazon, Tesla, Nvidia, or the next big thing” has no place in prudent investing. Some online forums may perpetuate the illusion that there are individuals who consistently identify the next big opportunity, but these fantasies should be taken with a grain of salt. They should not blind us to the advantages of maintaining a diversified income portfolio.
My only advice is that no one goes ‘all in’. Nothing in this life is certain save death and taxes. The ‘if only I had put my every last penny into Amazon /Tesla /Nvidia (or whatever); this time I’m going to go all in on XYZ which will be the next big one’ mentality has no place in investing, though to read some BBs you would think there are a stack of folks out there who unerringly step off the top of one long ladder and onto the foot of the next, deftly avoiding every snake which raises its ugly head !! Such fantasies should be taken with a pinch of salt, and should not blind us to the benefits of a decently diversified income portfolio.
Looking ahead, I plan to assess the performance of the indices at the end of the year. The FTSE 250 seems poised to record two consecutive years of losses. While the FTSE 100 may follow suit, the outcome remains uncertain. In the past two decades, there has been only one instance of two consecutive years of losses. If both indices post declines, the bet could be on 2024 shaping up to be a favorable year.