The information in this blog post is general market commentary in nature only. It cannot take into account individual circumstances and does not constitute financial advice.
Value versus growth
We’ve discussed value versus growth previously, and we believe that ‘value’ will outperform growth over the coming cycle.
Recall that growth has had a spectacular run for much of the past 10 years, while value has struggled.
But, as we know, all things cycle, and we believe that it’s time for value to dominate, with its long held advantage over growth.
Mean reversion, anyone?
Buying the dip?
Many finance folks are predicting great times ahead for those that ‘buy the dip’ especially after a 35% decline in the market (and a subsequent bounce).
Now they may roll out the old ‘average returns of 8%!’ (or whatever the latest catchphrase is) but then fail to disclose that the 8% is made up and periods like 1982-2000 (where a starting CAPE of about 8 saw US stocks return approximately 16% per annum), but also 1966 to 1982 (when those very same markets delivered nothing).
Of course, we’ve also previously discussed the importance of market cycles, and from 2000-2020 returns have been close to negative – after accounting for fees, taxes and inflation – simply because the starting valuation had risen to 44.
Now the standard response is ‘well, yes, but if you invest over the long term you’ll do just fine’.
This may be partly true.
The advisor will certainly do just fine, with a regular income from fees that you pay to hold through long periods of flat or negative returns.
You, on the other hand, could end up with distinctly underwhelming results if you pay too much for stocks.
Markets cycle, then, and if we have some indicators (like the CAPE ratio) which can inform our asset allocation, then we should be investing a lot when and where CAPE ratios are low, and less when and where they’re high.
The other point is that advisors and finance industry folks fail to state that the 15% or so on offer in 1982 is not the same as the negative return on offer in 2000.
Your start and end dates matter.
With that philosophy in mind how should we approach the future?
Alas, we have no personal magic in predicting the future and so we don’t throw out X% or 15% because we know it’s not that straightforward.
However, what we do know from a reading of market history and from simple maths is that the lower the price you pay, the better the return.
Let’s take a look at how we can use this knowledge with reference to out 8 timeless principles of investing.
As Howard Marks said:
‘I can’t predict, but I can prepare’.
Surveying the wreckage
In a bear market we should be ready with our heavy weighting to cash, and beginning to look for ‘value’ amidst the carnage.
One idea that we do promote is the risk hierarchy: the preference for most investors to stick to ETFs, or well-established companies that are in some way part of a country’s infrastructure (systemic type companies).
This typically means stocks large cap stocks at the bigger end of town, which also have strong balance sheets (i.e. manageable debt through a recession, or under a stress scenario), a competitive advantage, and a long history of trading profitably and delivering dividend payments.
It’s the dividends that we want to discuss here today.
Given what we know about valuations (they’re still fairly high) and what we know of the outlook for the next 12 months, we can foresee plenty of companies cutting their dividends, whether by choice or through necessity.
The latter case will probably be more prevalent given the parlous state of the global economy.
Even in a low interest rate environment we need to be conservative and judicious in selecting investments if we want to hold them for a reasonable period of time.
We also need to think about what the future looks like.
And while we won’t go into too much detail here today, we can probably expect to see less globalisation, more home country based production, and a greater role for governments in providing jobs and stability.
This is probably applicable to countries like Australia where there are significant levels of private debt, and investors will need some time to deleverage if the economy slows and unemployment rises (which looks certain at this stage).
Thus we don’t think this stock market decline will be a short-lived one.
We think it may persist for some time (we don’t know for sure, of course, but we’re remaining conservative in our views at this stage, since being hairy-chested may result in a large capital loss, through buying too hard and too early).
Generally speaking we think investments of interest will generally speaking be found in those sectors that are more value-oriented than the sectors which tend to do well in growth environments.
In other words, we’re saying telcos over technology companies.
Tech is fine on the way up, but an absence of growth and dividend payments may see them become exposed in a short while.
Opposed to that, companies such as AT&T, to pick just one such example, are currently paying a solid dividend.
Dividend cuts coming
Now as we mentioned these dividends may be cut with the expected decline in earnings.
At other stress points in history companies have cut their dividend payments – and sometimes by a substantial amount – but while this may temporarily make them look like a ‘bad’ investment, we believe over time these solid, systemic companies will outperform and deliver consistently strong dividends if you buy at the right price.
Armed with our 8 timeless principles, as covered in our book, we think there are some sectors that will be strong performers over the years ahead.
We can use the CAPE ratio to determine which countries, sectors, and companies within those sectors are worthy of further research with a view to buying cheap when we think the bear has stopped growling.
We think the bear will be with us for some time yet, and there’s no need to rush in at this stage, but as Howard Marks and Baden Powell have both said…be prepared!
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