Last week looked fine until Friday, when the FTSE 100 took a 3.6% dip after news of the new Covid-19 omicron variant emerged. It meant the UK’s top index was down 2.5% on the week, dipping as low as 7,042 points at one stage during the day.
A valid sell-off, or a bit of a knee-jerk reaction? I think a bit of both. As I write on Monday afternoon, the Footsie is back up 1.6%, to 7,159 points. So what lessons do I see, and how will it affect my investing strategy?
I do think last week’s slump helped illustrate the risks involved in recovery investing. Hammered stocks can recover strongly and can make us some nice profits. But by avoiding them, I have avoided some costly mistakes in 2020 and 2021.
I won’t buy a recovery stock until I see evidence of the recovery actually happening. I don’t mean improving sentiment and a share price rebound. And I don’t mean an improvement in business against a troubled background while the background threats still exist. I mean the clear ending of the threats, and some solid progress back towards long-term profit and cash flow.
Avoiding risky opportunities
It means I won’t get in at the bottom and I won’t make the biggest profits. Those who are happy to take a bigger risk might maximise their gains, and I wish them success. But I reduce my chances of a loss, or even a complete wipeout.
Take International Consolidated Airlines, as an example FTSE 100 recovery stock. Investors were bullish in early 2021, and the share price gained some ground. Passenger numbers were still well down, but creeping back. Many investors assumed 2019 levels would be regained, sometime. And the company looked like it had sufficient liquidity to survive the downturn. But two key things kept me away.
IAG was still making a loss and was not yet cash flow positive. And the threat had definitely not gone away. Covid-19 surges were still happening. And the possibility of new strains, as we saw painfully last week, was ever present. And the IAG share price has slumped again.
FTSE 100 recovery stock?
Rolls-Royce is one of those FTSE 100 companies that I’ve always liked but have never bought. And its shares have been gaining over the past few months. Is it a recovery stock I will buy now? Again no. That’s because I won’t buy into companies that are directly impacted by Covid until we’re closer to seeing the end of the virus’s effects.
Both of these companies might well turn out to be good buys, and I might be missing out by avoiding them. But I’m sticking with my approach as we face this new omicron threat.
I prefer the safety through diversification, and the dividend income, that I can get from carefully selected investment trusts. Right now I hold City of London Investment Trust, and I’m looking at others. There’s a risk that City of London could suffer and have to cut its dividend — but so far it has managed to raise it for 55 years in a row.
But most of all, I’m really not thinking about where my stocks will go in 2022. I’m more interested in where they’ll be in 2032.