Investors have woken to a brave new world: a police-enforced UK lockdown. High street favourites like McDonald’s, Costa and Greggs have shut their doors.
People are not allowed to leave their homes except for to buy food or medicine, to go to work or exercise once a day.
When, outside of wartime, would we face these kinds of restrictions? Never in my lifetime.
I know a few people who watched the 2020 stock market crash and sold anything they could turn to cash. All their shares, all their bonds, all their funds and investment trusts. It’s very hard not to follow the crowd. Even seasoned professionals aren’t immune to these powerful psychological forces.
But the way I think investors will gain the most and still protect their wealth is to follow solid value investing principles. That is: to buy good companies cheaply and don’t sell when prices are low.
What we face
I read a good article this week that said investors will make the most money in their life in a bear market: they just won’t know it at the time. When the value of your portfolio is down 30% to 50% it’s hard to stay positive. Doing so takes guts and determination.
Most value investors are waiting for the bottom of the market to dive in and snap up FTSE 100 bargains. That could be Royal Dutch Shell, BP, Lloyds or another bargain share. P/E ratios that were in the mid-20s now sit in single-digits.
That makes for some cracking long-term high-yield stocks that will compound to make us richer.
But my watchlist also includes stocks that were too expensive for some to buy in the good years, yet now seem a steal. They include FTSE 250 and AIM-listed companies with high profits, no physical stores to close and unassailable competitive leads in their fields, like SDI Group, Team17, Avon Rubber and TP Group.
Action or inaction?
There’s a well-observed trend among investors in falling markets called the action bias.
Just doing something, anything, feels like progress. It feels like we’re taking control in troubled times. But it also leads to what I described above, like selling your hard-fought-for investments at fire-sale prices, or jumping in to invest money you don’t really have because prices are low.
Recession coming
Central banks are throwing the kitchen sink at markets to stave off what I see as an inevitable recession. They include huge stimulus packages from the Bank of England, the European Central Bank and the Federal Reserve, and an upcoming $1trn coronavirus bridge funding deal in the US. This might put off the pain for now, but more is coming.
PMI manufacturing and services sector data out today confirms what we already knew: that the UK is about to enter a deep recession. So even if the markets flatten out, I’ll wait a little longer before leaping in.
A fifth of the world’s population is under some sort of enforced quarantine along the lines of the UK lockdown. With government orders to stay at home to save lives, we seem to have landed in a strange Twilight Zone. It will pass, but it may take longer than you think.
If you’re a long-term investor like me, you’re stockpiling cash for the inevitable rally. I’ll load up on my preferred FTSE 100 high-yielders when markets turn.