Author: Gabriel Grego, Zanshin Capital
Covestor model: Buffettian Value
We are clearly in the midst of a perfect storm in the financial markets. The S&P 500 index has lost a huge portion of its value in the period from late July to mid-August. There have been few precedents of such a sudden and steep decline, not least among them the aftermath of Lehman Brothers collapse in 2008.
The immediate causes of the decline are quite evident, among them:
– The last minute, mediocre compromise on the raising of the US debt ceiling, where politicians were flirting with sovereign default and eventually compromised with a solution that reduces vital short term spending at a time the economy needs it the most, but does not tackle the long term swelling of the US debt.
– The US fall from AAA debt rating, courtesy of S&P (with which I actually tend to agree).
– The latest European sovereign debt crisis spreading with worrying speed throughout the banking system.
– The marked slowdown in the US GDP growth rate which, in my opinion, is the most important of the aforementioned factors.
In my experience working in the financial markets, I have learned not to rely on macroeconomic forecasts for my investment decisions. With a few notable exceptions, I find that macroeconomic forecasts tend to have the same reliability as astrological chart readings. This being said, it is clear that the world economy is undergoing severe threats to its well being. As much as it is a powerful, negative psychological event, I am not worried by the US downgrade either. It is only one agency out of three and AA+ is not exactly junk level. As much as I tend to be bearish on Europe’s long term economic future, I believe that the EU credit problems are solvable, albeit at a painful cost. As a matter of fact, we can wish that Europe’s troubles will act as a catalyst to spur long-needed economic reforms (Italy is now considering further privatization, liberalization and loosening of the labor market).
The US growth slowdown is a different beast, and is potentially far more troublesome. If the US were to enter a recession, we would probably be in more serious trouble, as government budget constraints and the lack of monetary leeway mean a quick fix is unlikely. Luckily, I think the odds are still against a recession and more in favor of a prolonged low-growth period.
Panic is back in the markets, and with it comes investment opportunities. At Zanshin Capital, these are the true moments of truth and the periods where, in the long run, we aim to make most of our decisions that carry the highest impact. Valuations are finally low across the board, and there are emerging bargains in a number of industries, mostly notably financials.
Some companies are well equipped to deal with adverse economic scenarios. In 2008-9 most corporations focused on sharply reducing their cost base and improving balance sheets, while the downturn knocked out plenty of competitors off their feet. A recession is still unlikely, but if it were to materialize, most blue chip stocks are in an exceptionally good shape to handle it.
Of course, it is hard to fish at the bottom of a bear market, so at Zanshin we don’t even try to do it. All we are considering when making our buying decision is the intrinsic value of the companies we are looking at and the price at which we can acquire them. Should the price drop sharply post acquisition, we would simply buy more of a good thing. If a recession were to materialize, equity prices, as cheap as they already are, are likely to go down even further. Should this happen, there would be neither panic nor fear on our side – only firm resolution to further take advantage of the situation. This is the reason why our buying is gradual and selective, rather than massive and indiscriminate.
We have many choices confronting us these days. ‘Buy now or wait for later?’ is one of them. Another important one is choosing whether to acquire fair companies at extremely low prices (e.g., European banks) or truly solid ones at what we consider a decent discount to fair value. We tend to opt for the second option and while this might well cost us some gains, we make up for that in sound sleep at night. We would never gamble with our money, no matter what the potential pay off.
Many investors are very conservative currently, as these are truly hard times to be in. However, we believe that it is precisely at these times of panic, fear and pessimism that Zanshin’s value-oriented strategy makes the most sense.
