Keep calm and add on

“If you have spare funds, cobble them together and immediately send them to your brokerage account, moments like these come around few times, you must be buying shares and not even thinking about selling them.”

To market to market to buy a fat pig. People are dumb. Not you or I of course, never, other people. There are 7.36 billion of us (54 million extra so far this year) all with different emotions. Obviously there are far fewer participants in equity markets, the principals pretty much still stay the same for humanity, panic is something that we do. Not all of us of course, like the dumb, other people panic, right? Yesterday I was back from the Eastern Cape and KZN, Michael kept you in tune with these wild moves whilst I was away. Excellent work! Some of the “driving” that I saw exhibited classic investment behaviour. Ignoring common sense. Overtaking on blind rises with a view that of course nothing will come over the hill on the other side. Investing is about being cautious and staying the course, keep to the road.

When the US market opened yesterday we saw behaviour from equities market participants that we do not often see. Massive businesses like Apple sold off 10 percent at the start, the Dow Jones dropped over 1000 points, the only other time I have ever seen this was the flash crash, that time I was alone on my couch in my living room at home. This time we were all here in the office. The Intraday moves however also resembled something very strange. The S&P lost 100 points in early trade, something I think that I have also only seen once, in the flash crash. By lunchtime in New York, stocks were barely lower, there was accelerated selling into the close.

Some other moves were bizarre, I was scratching my head and wondering if I had seen them before. Starbucks was down 20 percent at the open, seven minutes later the stock was down 2 percent. In other words in the panic selling (and remember for every seller there is a buyer), someone was showing around 20 percent gains on Starbucks by the close last evening. Equally, Apple was 60 billion Dollars higher in market cap than at the lowest point in the day.

As Michael has pointed out over the days of keeping you calm and carrying on, the angst is mainly associated with worries in China. Part their stock market, which is now flat for the year, down actually around 4-5 percent with todays moves lower. Over 12 months however the Shanghai Stock Exchange is up 37 percent. Yes, true story. Of course it is the morbid human fascination with the things that could go wrong. Everyone focuses on the fact that the Chinese stocks are down 40 percent from their highs in mid June. That is a pretty heavy fall. And the average multiple of the market, the Shanghai Stock Exchange? Is it 35, 105, 25, or 15? Of course I know that you are all clever and have been paying attention and know that the average price to earnings multiple (the share price divided by the earnings per share) is 15.77 times.

Let us try and quantify the Chinese worries in numbers. The economy size in aggregate is 10 trillion Dollars, it is the second biggest standalone economy in the world. If the country has a growth rate of “around 7 percent” as per guidance from Beijing, that is an extra 700 billion Dollars, right? If, worst case scenario, it falls to 6 percent, that is an extra 600 billion Dollars. The entire size of the Chinese economy 20 years ago was about what they expect to add this year. Read that again carefully to understand it. If it is “only” 6 percent growth (whilst everyone else struggles with next to nothing), then additional growth is equal to the entire Chinese economy 21 years ago. It is again dumb to expect an ever increasing base to grow at the same rate, perhaps I am the one who is dumb, that should be the expectation.

If global assets shed trillions of Dollars from their highs over 100 billion Dollars of growth expectations, including a 60 billion Dollar swing from the biggest company in the world, Apple, doesn’t that all sound a little strange? Maybe to me. For the record, Apple has a market cap of 603 billion Dollars and over 203 billion Dollars of cash. Over one-third of the entire market capitalisation is cash. Sounds like a business that you should be owning, not selling off ten percent?

I am sure that I made this point a while back, unless my memory fails me, Berkshire made their biggest ever acquisition when the S&P 500 was 200 points higher, that was all of 2 weeks ago. So, unless I am missing something, the greatest investor of our time (Warren Buffett) bought a business on a 22 earnings multiple and shelled out 37 billion Dollars a mere 2 weeks ago. If that guy, the man that has turned more ordinary people into Dollar millionaires is confident enough to be buying at higher levels then so should you at these lower levels.

What to do?

1) If you have spare funds, cobble them together and immediately send them to your brokerage account, moments like these come around few times, you must be buying shares and not even thinking about selling them.

2) This “story” has gone mainstream, the global equities market sell off over the last two weeks has now become part of the normal news. Keep a level head. The companies are the same as they were yesterday, the same as they will be next week.

3) The storm will pass, it always does. In a few weeks the screens will be interested with the Greek snap elections, Republican primaries, perhaps Joe Biden running against Hillary Clinton.

4) The Rand and the local equities markets do not escape the selling, these are NOT isolated as a result of any other reason you can think up today. The Malaysian Ringgit plumbs multi decade lows to the US Dollar, same thing, emerging market and commodities (soft and hard commodities).

Of course the selling might intensify again, you are never going to time the bottom perfectly. Get invested, take spare cash and commit it to the same companies that are growing earnings strongly. Most of all, never panic. Ignore the shouting voices, they possibly have nothing to gain or lose if the markets go one way or another. And as I said to several journalists yesterday and one this morning, I do not know one person personally who is invested in the Chinese mainland equities market, do you?

I shall leave you to read two pieces, one, the Ben Carlson piece from yesterday titled Crash Rules Everything Around Me. I like that part, and I really think that you should memorise it and tell it to people: “U.S. stocks were up nearly 400% in the 1980s. All anyone remembers is the 1987 crash.”

And then another one that Paul sent yesterday evening, from FiveThirtyEight titled Worried About The Stock Market? Whatever You Do, Don’t Sell. The chart in the middle is, as per the article: “two people who each invested $1,000 in the S&P 500 at the beginning of 1980. The first one buys once and never sells. The second one is slightly more cautious: He sells any time the market loses 5 percent in a week, and buys back in once it rebounds 3 percent from wherever it bottoms out.” The difference is astonishing:

Home again, home again, jiggety-jog. US futures are sharply higher than they were yesterday. Chinese stocks are getting smoked again. We said that. Other markets across Asia are better this morning, we should recover through the day. Keep calm, add on.

Sent to you by the Vestacters, Sasha, Michael, Byron and Paul.

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