According to CNBC, former hedge fund manager Jim Cramer said on Squawk Box last Friday that he intended to invest some of his own money in the markets by the end of that day.
The Mad Money presenter urged investors “with long-term horizons to retirement” to put their money to work in the steep stock market correction.
Okay. It’s a familiar message that chimes with Warren Buffett’s approach — he’s known for being greedy in the markets when others are fearful. And Cramer said he’s just going to “automatically” put his money to work whether he likes it or not. He reckons those that have waited and waited to put money in the markets “have no choice but to buy something.”
Some sectors Cramer is avoiding
But why should we listen to Cramer? One reason is that he claims to have achieved an annualised rate of return of 24% after all fees for 15 years while he was running his hedge fund. However, a better reason is that the process of buying the shares of good-quality companies when they are on sale can be a successful strategy. We at the Motley Fool are generally keen on such an approach, for example.
However, there are some sectors that Cramer says he’d continue to avoid, such as travel and leisure, including autos and airlines. He reckons such stocks could have further to fall in the current environment.
And it seems clear that airlines have been particularly badly hit so far. For example, as I write, Wizz Air is down around 25% in just over a week. And International Consolidated Airlines has plunged by 33%, Easyjet is down 37% and Dart is 42% lower and falling, just like all airline shares seem to be.
Indeed, we need nerves of steel to act on Cramer’s advice and buy share right now. But I’d do it. And I’d focus on trying to bag quality companies at knock-down prices. For me, that means searching firstly for firms with strong defensive characteristics rather than those operating businesses in cyclical sectors.
Shares I’d buy
I like stocks such as AstraZeneca, Diageo, British American Tobacco, Britvic, National Grid, Reckitt Benckiser and other such defensive operators. It’s shares like those that I’m watching closely right now and waiting for opportune moments to strike.
But if you are investing regular monthly amounts in the markets, I reckon the important thing is to keep going. Even if shares fall further, the process of pound-cost averaging will help boost your returns when markets ‘normalise’ again.
Indeed, I reckon it’s easy for those investors putting regular sums in index tracker funds, for example. In cases like that, the only adjustment I’d try to make would be to increase my monthly investment as the markets weaken and the opportunity to get more units for your money opens up.