“If you can keep your head, while all about you are losing theirs… you’ll be a man, my son.”
Apologies for Rudyard Kipling’s slightly archaic language, but rarely have his sentiments been more appropriate.
No stranger to personal setbacks and tragedies, Kipling would even so have struggled to imagine the scale of what is going on right now. Back in 1910 – when the poem If… was written – even the global pneumonia pandemic of 1918, which killed millions, lay in the future.
Nevertheless, it’s clear that a lot of investors are losing their heads.
Sell! Sell! Sell!
On a factual level, the evidence is incontrovertible.
What causes share prices – and therefore stock indices – to go down is selling pressure. And with the FTSE 100 down 35% since 20 January as I write this on 25 March, there’s clearly been a lot of just that.
The logic seems to be twofold.
First, with large parts of the economy shutting down, and depressed incomes likely to impact demand for some considerable time, it’s clear that profits – and therefore dividends – will take a considerable hit. Already, dividends are being cut or cancelled.
Second, there’s been a ‘dash for cash’. Clearly, with Bank Rate at a historic low of 0.1% (and believe me, I never thought that I’d ever write those words), cashed-up investors aren’t going to get much of a return.
Their rationale, therefore, is likely to be wealth preservation, pure and simple.
That said, cashing up when shares have fallen so far is likely to crystallise heavy losses. So there’ll be rather less wealth to preserve.
Giants laid low
So what should investors do, going forward? What should you do?
Personally, I haven’t sold anything. On the other hand, I haven’t bought much, either: on a practical basis, it made more sense for me to wait until the start of the new tax year, and the opportunity to use up a fresh ISA allowance.
As I’ve written many times, the problem with selling is that one has to decide what to buy – and in today’s fast-moving world, that can be tricky.
Primark, for instance, has closed all its stores in every country – who could have foreseen that just a few weeks ago? Its owner, Associated British Foods, is one of those quality businesses that to me have always tended to have too rich a price-to-earnings (P/E) ratio and too low a yield every time that I’ve taken a look.
But now? Maybe not. Ditto companies such as Diageo and Next – with the latter’s share price putting it on a P/E ratio of 8.5, on a historic basis, as I write these words.
And on a forward basis? Who, frankly, has the faintest idea?
Steel your nerves
Clearly, there are bargains out there. And one day, Primark-owner Associated British Foods, Diageo, and Next might all be seen as screaming bargains at today’s prices.
No one knows when exactly that day will be, though. And the present stock market turmoil could continue for months.
As ever, then, it’s clear that timing any entry points will be incredibly difficult – and frankly, probably a mug’s game.
So if you see a share price that you like, in a business that looks viable, then my view would be to seize the moment, fasten your seat belts, and buy it. Judging viability in today’s uncertain times is no easy matter, but businesses with a global footprint in the upper reaches of the FTSE 100 are the most obvious places to start looking.
But be prepared for a bumpy ride.
As Kipling observed, it’s all about keeping your head.