In a week of severe stock market turbulence I come back from a week away to see swirling whirlpools stirred by uncertainty and panic.
So the question has to be: What do you and I do now?
I have three key memories that keep resurfacing which I want to share with you:
1. Yield. When I started my first job in the UK stockmarket in 1979, the key determinant of valuation was yield. Definitely not earnings. Nobody trusted earnings. Not prospective dividend yield either, but the historic dividend yield on stocks. Stock selection in the face of a recession needs to be based on the ability to survive. Choose companies that will continue to manufacture or sell their products because we need them in our day to day lives (I’m thonking food and healthcare), and value them using historic dividend yield.
Are these companies more likely to survive than your bank? Yes, probably. So maybe a dividend yield of over 7%, preferably nearer 10%, would be the levels to start buying.
2. Asset protection. I was in Argentina a couple of years ago, staying at a wonderful ‘loft’ apartment in Buenos Aires and talking about property values by the pool with a local who owned three apartments in the building. He said simply that investing your money in property is safer than in the banks. The banks can (and did) take it away. He didn’t own three properties because he was speculating on rising property values, he owned them because he believed them to be secure assets.
So that prompts me to think again about property as a secure asset, in that it will still be there next year, whereas your cash may not be.
What about Gold? Yes, it is secure, but I get that niggling feeling that if I buy gold now I’ll be the last to the party. Having said that, it may be worth owning only as an insurance policy for 5-10% of your assets.
3. Time to buy? These markets could easily fall another 30% from here, possibly in the next week! Where there is panic there is also opportunity, and we are getting closer to the opportunity levels. So do your research now and get your shopping list together. Then close your eyes, put in buying orders with strict limits, and above all don’t tell the mrs (or your partner)! Don’t use all your firepower, but start to drip money into the market bit by bit.
In October 1987 as the market plunged the experienced hands were saying use this as a buying opportunity, while the younger guys (including me) were panicking. Of course it was the wise brokers who had lived through the early 1970’s who were right.
Do we head for a depression? Maybe. We’re already in a (likely prolonged) recession. Nouriel Roubini suggests not a quick two quarters of negative GDP, but a prolonged 2 year recession (Roubini: The world is at severe risk of a global systemic financial meltdown and a severe global depression). Either way diversification of your assets is key.
Lastly, turn the TV off and don’t get sucked overboard into the maelstrom. The turning points for markets are when your cab driver is talking about them. Remember 2000 when cabbies told you which tech stocks to buy? What are they saying now? (I’d love to hear- please write their comments in the box below).
Above all, follow your gut instinct. And Good luck!
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