I have been hearing concerns about the state of the economy, inflation trend, looming recession, etc. since the beginning of 2022. Some blog readers have sent me comments on this. I hear this from other individual investors who I regularly interact with. All these macroeconomic issues are bedeviling the stock market for 18 months. In anticipation of continuing economic distress, some investors stopped adding to their portfolios. Others took some cash out. But here we are in the middle of 2023 with the stock market well off its October lows. Macro conditions have improved some (e.g. inflation is trending down). But there is enough uncertainty about the direction of interest rates and a potential recession to make some investors wary of stocks.
My investing style is different, however. I increase my investing pace as the market goes down. I don’t hold a view on the economy, other than that its near-term problems will eventually be resolved. It might take six months, or it might take a couple of years.
As to the question of why stocks have staged a major comeback this year (the S&P 500 is now up by 25% since its Oct ’22 low), we must remember that the stock market moves in anticipation of an event, not in reaction to it.
It reminds me of this quote of Warren Buffett:
… The market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Buffett wrote this in late 2008 when the economy was in far worse shape than today.
So today the market is moving up in anticipation of an imminent economic recovery. There are clear signs of improvement. It is possible though that the economy could take a turn for the worse before it recovers (perhaps a recession will finally show up). We just don’t know yet. But it still shouldn’t deter us from investing.
Along these lines, Terry Smith, a well-known UK based investor, said this in his July 2023 investor letter:
Turning from company fundamentals to the macro environment, what level of interest rates will be required to tame inflation? We don’t know. Will there be a recession? Of course, but we have no idea when. What will happen in Ukraine? We haven’t a clue. Will China take action over Taiwan and how will the United States respond? We have no view. Even if we had we are not sure how markets would react. Fortunately, it continues to be the case that we do not invest on the basis of our predictions about macroeconomics and geopolitics. [emphasis added]
So Terry Smith does not base his investing on macroeconomic expectations. He buys good businesses, holds them for long periods, and counts on an eventual economic recovery. Note what he says about recession in the above quote. There will always be a recession (or two) in our future — we just don’t know when. I saw an apt quote on Twitter the other day: We are always either in a recession or heading towards one. So true!
Terry Smith is a highly successful investor. His semi-annual shareholder letters are full of investing wisdom. His book, Investing for Growth, should be on every aspiring investor’s book shelf. I read his writings regularly, even though I am not invested in his fund. His focus is on high-quality businesses where he can invest for the long term. This is what I aim to do as well. Though we do tend to move in different directions. I follow his general investing advice but I do not hold the same equities. As of June 2023, only two of my top-ten positions overlaps his fund’s top-ten holdings: Microsoft (MSFT) and Meta Platforms (META)
So how are my contrarian against-the-prevailing-sentiment stock purchases of 2022 doing today? Last time I wrote about my dry powder buys in October last year. Those were new stock purchases from my dry powder cash. Since then, I bought some more equities in November and December. As the market recovered from its October lows, I haven’t been able to deploy any additional cash this year. However, I did sell a few small equity stakes and redeployed the cash into more promising businesses that were being offered on bargain terms. I call these my market-neutral buys.
Today, the S&P 500 is down about 7%. My opportunistic dry powder purchases are already up by 23%. Add in the market-neutral purchases, I am up by more than 25% already.
What did I buy?
These were all incremental adds to the businesses I had already owned in my portfolio. Some of these positions have doubled since then. Notable among the big winners so far are Meta Platforms (META) and Tesla (TSLA). Both have seen their share prices more than double; 2.8x and 2.6x respectively. Many others have gone up by 30 to 50% in less than a year. There are a few laggards too. Notably among them are Disney (DIS) and Brookfield (BN, BAM). Both are excellent durable businesses that I plan to stay invested in.
Below is an interesting graph. It shows timing of my stock purchases since this market downturn began in early 2022. You can see how my buys were clustered around new market lows. Of course, these were not results of any intentional timings of the market lows per se. I just followed my battle-tested plan to deploy cash as the market dropped below a set level.
Dollar-cost averaging also works in a similar manner. As share prices drop, an investor is able to buy even more shares with the same dollar amount. Granted it doesn’t feel good as we investors follow the market downward (catching a falling knife, so to speak) while racking up more losses. As I wrote in my October post (when the market was near its bottom but not quite), my new purchases had already lost 8% of value while my overall portfolio was down more than 25%. Ouch! It wasn’t a fun place to be in but as I said I am a battle-tested investor. I stayed the course while ignoring market pundits. I didn’t wait then for the robins to show up, and I am better off today because of it.