Don’t Run
No organ in your body is more concerned about preserving you than your brain. For time immemorial your brain has excelled at making sure that within miliseconds of identifying impending danger, you are flooded with adrenalin and run for safety. Your existence today shows it was not all in vain.
However, when you don’t allow information to go through your Cerebral cortex (part that makes us human) you miss out on the better parts of investing on the stock market. If you refer back to our philosophy document you will remember that for the most part we advise sitting on your hands as the market goes through a number of phases that have nothing do with us. Referring to the same document you will note that we have also pointed out that we go in when everyone else is running out.
The biggest stumbling block here is normally the fear of losing all your money, a perfectly normal fear but one that perhaps needs a little looking into.
Another helpful read in this regard can be found here on why investing is so scary. It is always helpful to know where your money is going including understanding that sometimes the share performance of a company is removed from its performance as a business.
The first thing to note is that South African companies for the large part have had very flat earnings (ie earnings that are not increasing or decreasing by any significant amount). This is very very important as it implies that at worst our companies have been going back by the rate of inflation. At best it means that the companies are almost as poor as you and I but not going backwards as if you had lost your job or had an unexpected baby. So a move backwards but nothing to panic about, certainly keep your eyes firmly on it but don’t panic.
The next and very important thing to notice is our valuation of the balance sheet, ie the Statement of Financial Position. This tells us about the expected future monies that will be paid out (Liabilities) and the future expected money inflows (Assets). Of even stricter requirement for us at Finance hut is the Current assets (so Bank and any easily sellable assets) being greater than current liabilities by a factor of two and long term liabilities by one.
For us a company that is able to pay off it’s liabilities within one year using its bank monies and easily sellable assets is a company we deem capable of weathering any short term storms. You can get our 1 year dated thoughts on a few of the companies we hold in our portfolio here. Fear not that we are a year out as we are long term holders and therefore keep a calm head when providing updates, thus affording us the opportunity to provide a more cerebral response to market actions.
Now coming to your money and how you would lose it if all went bad:
Firstly note that a company would have to have greater debts (Liabilities) than it can afford for it to be liquidated. Not only that but the people that they owe the money to would have to insist on immediate payment. A risk that doesn’t exist for the companies we like. Our companies are mostly in a position to pay of their long term liabilities almost cash and still be left with land, buildings, cars and the security guards. So you can rest assured that a scandal breaking out that there was acounting irregullarities (think the guys that have been in the news) is unlikely as they do not find themselves where they are in a situation where they have to appear to look better than they actually are.
The second way that the companies we like would have to lose your money would be if they were declining rapidly and in the process using cash to come up with solutions. Again an unlikely situation as stated above not many companies’ sales have been declining beyond reason. Again look carefully at the specific company you would like to buy before making the final decision. What to look out for is in the Stock research philosophy document.
So what should I do now, what should I expect?
This is our once in seven years moment. The time to buy before we go off to hibernate with our hands under us. What is important is to note that what has gotten cheaper can still get a lot more cheaper. Alternatively though, holding out for the “lowest” point could also backfire as noone can correctly predict when the share prices are at their lowest. So my take would be buy a good chunk of shares for the next couple of months on a regular basis until market sentiment has started to improve again. Fear not once your due diligence has been done, as your conviction in your research is just as important as the hard work you have put in.
A lot more indirectly, it is also worth looking out or what the companies you have identified are doing in the current environment. Ideally, as companies that are sitting on cash, they should be taking advantage of the opportunities that are avaliable in the market thus reducing the burden on you to be making more additions to your portfolio. If your companies are doing this, consider increasing your shareholding in your current companies instead of looking for new opportunities outside. This should also confirm to you that the cash you had identified is indeed real.
Picking your own stocks can be a very liberating experience and in the long term a very rewarding skill to have, both in terms of the ability to benefit from your own lifestyle but also for the amount of data you are able to consume and convert into actionable information. As always take the necessary precautions and be sure to keep in contact to let us know how it is going ☺. Check out Simon Brown’s portfolio below to get composition ideas etc…
