Don't Panic: Raise Cash and Do Cautious Buying
Source: Adrian Day's Global Analyst (10/17/08)
Adrian Day’s reputation for discovering big winners adds credibility to the global investing pioneer’s insights, which he is sharing with The Gold Report via excerpts from recent articles in Adrian Day's Global Analyst. Although he paints a rather dismal portrait of the US economy, he does not want to see the current crisis either panic or paralyze investors. While acknowledging that investor options in this environment lead into some uncharted waters, there are options and an occasional ray of sunlight in slipping through the thunderheads.
Don't Panic: Raise Cash and Do Cautious Buying
There is no denying the bloodbath in markets in recent weeks and months and the likelihood that this slowdown may be prolonged.
Major bubbles and the de-leveraging that follows their bursting take a long time to work through the system. A sustained rebound such as followed the 1987 crash should not be expected. The high levels of debt and leverage; the complexity of many of the assets held by banks and others; and the widespread need for de-leveraging, and the knock-effect that has, all mean it will be long.
And yet, and yet… though we have not seen the last of the credit problems, and we anticipate a protracted economic slowdown, we are cautiously positive on many of our holdings in the period ahead and see some great buying opportunities.
We Own Great Companies
Many big names in the industry, including Bears, Lehman, AIG, Fannie Mae and Wachovia, have been wiped out, and more are threatened. But we are not worried about most of companies we own, large or small, companies like HSBC, Gladstone, and Virginia. These are companies that will survive, regardless of their stock prices, and, with strong cash balances, are in a position to benefit from the depressed prices, ready to take advantage of opportunities in their respective markets.
We own many excellent companies, several selling below their intrinsic values, in some cases below even their cash levels. These stocks have the potential to recover value as quickly as they lost it, companies yielding in the high teens whose stock prices will recover when calm returns to the market, but in the meantime pay good dividends; or junior exploration companies, selling for cash, with low burn rates and numerous projects, where a discovery will see a stock multiply in price.
Don’t Dump Undervalued Assets
We don’t like the losses already experienced, and there will doubtless be more fluctuation and sliding ahead. But we don’t sell Ben Graham’s proverbial dollar bill for 50 cents, even if it might trade for 40 cents in the meantime.
It’s not a good idea to dump stocks in the midst of a panic liquidation, when markets are illiquid and depressed. Again, Ben Graham, author of The Intelligent Investor, advised investors with a portfolio of sound stocks “never (to) buy a stock because it has gone up or sell one because it has gone down.” He suggested a good motto: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.”
This is for financial reasons but also psychological; such selling (or buying) means one is being reactive and emotional, two enemies of investment success.
Investors should be more defensive in the period ahead, and suggest some gold bullion and some cash (short-term foreign currency deposits) as a bulwark against further threats from ongoing credit problems and liquidation.
Buy Great Companies When the Prices are Down
Rather than broad selling, we believe that “the point of maximum pessimism” is the time for buying, judicious, selective and conservative, but buying nonetheless, as we accumulate portfolios of top-quality companies that will serve us in good stead in the years ahead.
John Templeton advised buying “at the point of maximum pessimism.” If you can afford to wait a few years until Mr. Market regains his sanity, then don’t worry too much about fluctuating stock prices in the meantime. Buy great companies selling at below their intrinsic worth (with an emphasis on balance sheets), particularly those with sustainable dividends, and hold.
We must recognize, however, that value and growth prospects are far less important for near-term stock prices than liquidity and sentiment, both of which remain extremely negative. Even the best values can’t fight that in the current environment. Let’s try to summarize the actions investors should take.
1. Recognize that the world has changed and that the credit contraction could be prolonged. Any companies we liked six months ago where the risk has suddenly increased are not appropriate for this new environment. Top of the list: companies with weak balance sheets that will need to raise more capital. Take a rigorous look at your portfolio and sell those that don’t make the cut.
2. Hold on to quality companies, with strong balance sheets, especially those trading below their intrinsic value.
3. Buy, not for a bounce, but to accumulate a portfolio of the best companies at low prices; this includes major global companies and top resource companies. As John Pugsley puts it, following Ben Graham’s parable: “Mr. Market is knocking at the door, desperate to sell you fabulous companies at a dime on the dollar.” Accommodate him! But be selective and not to aggressive in buying. To borrow a delicious phrase from an unnamed Mitsubishi banker, even though you might be feeling like a kid in a candy store, avoid acting like one!
Adrian Day is President of Adrian Day Asset Management, which manages portfolios in resource and global equities. Contact him at Adrian Day Asset Management, 801 Compass Way, Suite 207, Box 6643, Annapolis, MD 21401; Tel: 410-224-2037; Fax: 410-224-8229; Email Adrian Day