Value investing through a crisis

Disclaimer: the information in this post represents general market commentary only, and does not constitute advice in any way.

Too early…or too late?

As we’ve been saying for a long while global stock markets have been a somewhat difficult place for investors like us who adopt a systematic approach and remain steadfast to our investment philosophy and principles.

As markets rise, we rebalance to take profits – only to see the market climb further – this becomes a common emotional pain point, when you’re an investor using market cycles to determine your asset allocation. 

Invariably you appear to sell ‘too early’, and while everyone else enjoys the party and bragging rights you’re sitting in more and more cash. 

Well, we have periodically looked somewhat silly over the past 12 months as the 2019 stock markets returns were very strong, in the range of 20-25%.

Alas, we missed out on the bulk of those gains.

But in saying that, did we miss out? 

Well, not really, because markets since crumbled back to 2009 prices, so far, in the space of about 5 weeks (the Aussie index was also at the same level as today in 2006).

So the stock market is now considerably lower than where it was before it started its 2019 run, with a decade of price gains erased in about five weeks.

So much for buy and hold in all markets.

But whether markets are high or low, of course that doesn’t mean there are no opportunities, and this is what we want to discuss here today.

Seeking value

We know the US market has been expensive, and it has fallen sharply, but still it remains well above its long-term CAPE ratio of 17.

Even if you account for low interest rates, it’s hard to get interested or excited at these levels.

Europe has wandered about all over the place over the past 15 years but is generally cheaper than it was, and there appears to be some value in European countries and companies.

And the emerging markets take the prize for the lowest average CAPE ratio at about 13.

Amongst those we know that a few countries (Russia, Korea, Chile, Turkey, Pakistan, and a few others) are worthy of consideration for a portion of your hard-earned capital. 

Investing when emerging markets are cheap can still be challenging because they can still go lower, especially while there’s a global decline underway driven by COVID-19.

But, as Templeton said, to outperform you must do something different from the crowd.

At some stage we need to begin building a portfolio of investments including country ETFs, sectors, and individual companies. 

We believe there are some appealing countries, sectors, and individual companies that are worthy of further investigation or a small starting position.

Remember your asset allocation plan, as this is where you will be able to ensure that you don’t over-bet.

Not all or nothing

Investing does not mean piling into the markets all at once.

It means taking a disciplined and patient approach to building a portfolio. 

Over the coming weeks and months we’ll be searching markets far and wide for opportunities.

We’ll be in no rush as markets can stay low for many years. 

But, as a taster, we’ll be focusing on a global approach with an emphasis on those areas that are ‘cheap’.

At this stage this we may begin to look at commodities such as oil, sectors such as energy, and potentially a weighting towards emerging markets since some are becoming very cheap indeed.

While the US remains expensive, this doesn’t mean we avoid purchasing companies or sectors in the US market entirely, because there will eventually be opportunities to invest in great companies with long and proven histories, low debt, and a solid track record of paying dividends. 

To begin with your journey, check out some emerging markets and determine if they fit your systematic investment plan.

Read widely, check out other sources, and follow business news to see if there are any ETFs or companies that warrant further investigation. 

We encourage you to begin the search for yourself, and start with asking questions about value (which is what people have consistently failed to do in recent years).

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