In my last post, I wrote that I have been buying stocks. Well, since then I continued buying stocks as the market dropped even further. At the time, I reported I had invested 60% of my dry powder cash. Today, I am 70% deployed.
As the stock market fell 35% below its peak, I started investing a fourth tranche of the dry powder into stocks. So far, I’ve spent about half of it. See my dry powder rulebook here.
I admit it doesn’t feel good when there is panic all around. In fact, on occasions, I felt a bit sick to my stomach as I saw the market dropping fast and yet I still went ahead with my purchases. It was impossible to not get affected by the prevailing fear and panic. And that’s one key reason why I have chosen a mechanical approach for my investing. When the market falls below a threshold, I buy a certain amount. This is in essence my dry powder rulebook. As I wrote in a July 2018 blog post (Be mechanical about investing), our gut instincts, our friends’ views, and most expert opinions we see in the media are not useful when it comes to investing.
Financial media is especially not very helpful in market conditions like these. Their number one job is to catch people’s attention today—not to provide a level-headed informed view of tomorrow. So, rather than watch market gurus on CNBC decipher every turn the stock market takes, I seek opinions of seasoned business leaders and money managers. Those that I have followed over the years and have come to trust.
So it felt good to hear from two of them last week. Both are highly successful long-term oriented asset managers who have been through times like these before.
Bruce Flatt: He is the long-tenured (going 20+ years) CEO of Brookfield Asset Management (BAM), a Canadian asset management company. Bruce is not only the CEO of the company, he’s also its largest shareholder. [I’ve previously written about Brookfield here.] He penned a letter to BAM shareholders (I am one of them) last week. While most of the letter was focused on company-specific data, he had some general observations regarding the state of the market today. These would be of interest to any stock investor out there. For instance, he wrote this:
It is very easy to invest in the markets when times are good, but it is in times of market decline that following the tenets of value investing matters most. We encourage you to follow them … We have switched our focus for investments to the listed stock markets … There are some stocks and debt starting to trade at a large discount to intrinsic value and we are focused on these.
Bruce Flatt, Update for Brookfield Shareholders, March 23, 2020
He is buying publicly traded stocks since many of them are now selling at a good discount. So am I. On his own company, he has this to say:
The main reason to consider the stock price [of Brookfield] at moments like these is that it allows you to acquire a portion of our business at a large discount from its real value… Our shares have sold off along with everything else. We have been acquiring, and will continue to acquire our own shares for value when it makes sense – and in time, we are certain they will recover.
Bruce Flatt, Update for Brookfield Shareholders, March 23, 2020
BAM shares have dropped by more than 40% since the middle of February. I had long admired the company and its management but only had a small fraction in my portfolio at the beginning of this year. Since then, I have been steadily buying—as I reported in last week’s post. My last buy was on March 23rd. Just like Bruce Flatt, I also find BAM shares to be of compelling value today.
Another business leader I heard from last week is Howard Marks. He is the co-founder of Oaktree Capital Management, another highly regarded asset manager. His memos are widely read in the investment community—and not just by the company shareholders. I wrote about Howard Marks and his memos here.
The following are his observations on today’s markets:
It’s easy to say that something approaching panic is present in the markets. We’ve seen record percentage declines several times within the last month (exceeded since 1940 only by Black Monday – October 19, 1987 – when the S&P 500 declined by 20.4% in a day) … We’re never happy to have the events that bring on chaos, and especially not the ones that are underway today. But it’s sentiment like [this] that fuels the emotional selling that allows us to access the greatest bargains.
Howard Marks, Oaktree Insights, March 19, 2020
Needless to say, he’s buying too. On the question of whether we’ve reached the bottom of this market decline, he said this:
“The bottom” is the day before the recovery begins. Thus it’s absolutely impossible to know when the bottom has been reached . . . ever. Oaktree explicitly rejects the notion of waiting for the bottom; we buy when we can access value cheap […] Given the price drops and selling we’ve seen so far, I believe this is a good time to invest, although of course it may prove not have been the best time.
Howard Marks, Oaktree Insights, March 19, 2020
He doesn’t know when the market would stop declining, but that doesn’t stop him from buying. Along the same lines, I don’t wait for the market bottom either. I buy because it is a good time to buy. And not wait for the absolute best time to buy, whenever it may be.
Both these gentlemen are smart and savvy investors. Both have successful track records spanning multiple decades. They are finding bargains in today’s markets. I may not be as smart or as experienced as they are so my purchases may not outperform theirs—but beating them is not my goal. When the stock market is down so much, there are bargains aplenty. Besides, I am also invested in the businesses that they run. So, their winners will be mine too!
Oaktree Capital is being acquired by Brookfield but just its public shares. Oaktree’s founding management would continue to own 40% of the company even after the acquisition. With me being a BAM shareholder, I’d continue to benefit from the future success of this combined entity. I wrote about this merger last year (An opportunity to invest in real assets).
Actions speak louder than words: I am also an investor in some other businesses whose leaders spoke through their actions last week. Specifically, they all bought their own stocks in open-market transactions (using their personal capital, not company cash) when the shares were dropping. Here’s the list of these insider purchases that I found to be significant. Note that I limited the list to only the businesses where I am a shareholder too.
I continue to hold my shares in these businesses, even though my holdings are down 30% to 60% at the moment. Needless to say, I don’t have any inside information on any one of these. I don’t know how much these businesses will be impacted in the near term. Would they need to cut dividends, stop share buybacks, or otherwise require some external assistance? Perhaps. If it happens, I believe it would only be temporary. I know these businesses well, have been studying them for a long time, and have no reasons to believe their business models are permanently impaired. And equally importantly, I am happy to see their managements increasing their own skin in the game, so to speak. They are in for the ride as much as I am.
These are trying times for investors. Especially for those investors who haven’t been in a bear market before. In that sense, I am more experienced. I have been investing for twenty plus years. But no matter how many bear markets one has gone through, it still feels the same when you are in one. That is, not good. But to be faithful to long-term investing requires discipline. And control of emotions.
I don’t invest any capital that I would need in next five years. Thus, I can afford to think in longer terms. I am also patient. I can ride out multi-year market declines. I wrote this in a blog post in 2018:
It’s never a good feeling to see the market value of my portfolio go down by 30% or 40%. But this is the price of admission to this game. To see my portfolio prosper and compound in value, I know I must stay invested throughout.
In the same vein, here’s a parting thought from none other than Warren Buffett himself:
The stock market is a device for transferring money from the impatient
to the patient.
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