It has been 10 years since the great financial crisis. Currently in 2018, there are a whole host of issues that the markets are getting jittery about. And not to mention, the recent series of retaliations on the trade front by the 2 largest economies in the world have made for what investors anticipate to be a storm on the horizon. At TheholyFinancier, we do not not hold a macro view and we don’t have very much to say about this that will make statistical sense.
But nonetheless, we recognize and acknowledge the fact that some of these unknowns will affect our portfolio sometime in the future.
These data is compiled from a multiplicity of sources and was supposed to form parts of several articles. But I am combining them into a singular article here.
Rising Interest Rates
Source : https://fred.stlouisfed.org/series/FEDFUNDS
Interest rates have been extremely low for a good number of years since 2009. And this largely explains why we are in one of the the longest running bull markets we have ever seen. The last 10 years have been a great run for many investors who have held onto stocks such as Amazon and some of these FANG stocks. But it can be seen, as recorded by the chart above that interest rates are starting to increase.
That also means that yields on government debt will have to go up as well. Previously, the government could borrow at nearly 0% in interest and now, they have to pay more in interest. As such, this puts a strain on the government’s ability to actually pay off its debts.
Stronger Dollar Against Other Currencies
A side effect of an increased interest rate is a strengthening in USD compared to other currencies. USD is perceived to be a safe haven in times of a recession or a panic and this causes a flight to safety from emerging markets. As markets rush to buy treasuries, this has caused the Dollar to become stronger.
Affected Emerging Markets
Source : Google
Source : Google
Source : Yahoo
The inadvertent flight to safety from emerging markets have caused the Shanghai stock market, the Singapore stock market and other emerging markets to fall by a considerable amount in a span of 1 year. The SSE Composite was around the 3400 levels. Now, it trades at around 2650. The STI Index has traded downwards from around 3500 to 3150 in a matter of months and the Ishares MSCI Emerging markets ETF has performed in a similar manner.
Does This Mean That The Bear Market Is Around The Corner?
Well anecdotally, yes. But the truth is that no one knows for sure. Market timing is a fascinating idea but the truth of the matter is that no one knows. If it were that simple to predict when the bear market is going to hit, then many of us would have been millionaires or billionaires by now.
So using market timing as a bearing to actually do well in stocks is actually an unrealistic idea.
You can’t time the market. I will give you an example of that. For years, Jim Rogers has been touting the demise of the market. US is ever more indebted now than 10 years ago and a period of rising interest rates can really sting the economy. And this can have a domino like effect on the global economy.
But at around that time, I bought into a company called Leader Electronics Corporation, a small, overlooked deep value stock. And the result was a rise in price from ¥298 to more than ¥1000. We sold out at 112% profit. Looking back on hindsight, if I had bought into the idea of market timing, there would have been a foregone opportunity of making a profit in Leader Electronics Corporation. And I would have forgone earning a profit on many other companies which have done fairly well over the last couple of years.
So, if you are planning on market timing, think again. Most investors who try to time to market are too afraid to buy at market bottoms as well. For some reason, the wrong call is always made by the large majority of investors.
The Bearing That We Should Have As Value Investors
At TheHolyfinancier, the way we look at market cycles is this. We most certainly disregard a whole lot of pundit talk. Our bearing is very much based on the fundamentals of a company. Our insistence is on valuation. So if a security happens to be undervalued at a glance, we will take a closer look. At a time like this, we still notice pockets of opportunities that investors can invest in. For one, markets such as Japan, Singapore, Hong Kong and Malaysia are throwing up a few names that are worthy of an analysis at the very least.
Hence, let your bearing be the fundamental soundness of a company, rather than a bet on the macro direction of an economy. We have some simple advice to investors.
- Buy deep value stocks with asymmetric payoffs
- If markets fall, buy more
- Recycle your capital if necessary
With regards to the 1st point I made, it is interesting to note that the opportunities for quality deep value stocks now are currently less than that what one would have experienced in the years of 2008 and 2009. So sticking to fundamental soundness will protect you to some extent from an over allocation to stocks if you do it right. Again, with deep value stocks, we are looking for asymmetric payoffs where a dollar invested can yield $3 or more in time to come. Look for such stocks where the risk-reward ratio is in your favor. House odds is what we are looking at here. Small mathematical advantages in your portfolio never hurts over the long run.
And after you make purchases, if the markets fall, so be it! You can look upon that as an opportunity to find serious multibagger opportunities that I have spoken about in my books.
And this brings me to point 3. If some of the stocks within your portfolio have appreciated quite a bit, it may be time to recycle that capital, as a property developer would, and use it to buy stocks which are relatively more undervalued. Or wait for opportunities to arise based on the fundamental soundness of some of these companies.
Uncertainty in the market is often confused with risk. Some of the brightest investors out there define risk as the permanent loss of capital. And in that context, uncertainty is always a good friend to have. The idea at the heart of it is to prevent a permanent loss of capital. The question though is : Can you stomach the uncertainty? For if you can stomach uncertainty and you know what you are doing, we are quite sure that you will come up smiling on the other end.
Thank you for reading! As always, may you be blessed with prosperity, health and happiness!
These books which I have written are case study driven and discuss strategies, mindsets and situational approaches to employing the net current asset value strategy.
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- A database of net net stocks or net current asset value stocks
- Investing ideas in members section
- Blog articles and investing education
- Investing research of deep value stocks