As the investing calendar year comes to a close, it’s valuable to reflect upon what we investors/wealth builders have learnt from 2016. As the philosopher George Santayana told us: “Those who cannot remember the past are condemned to repeat it!”
The spectacular and scary start to the trading year was, you might remember, a real head scratcher for me. I didn’t like the big commitment to the sell-off when our S&P/ASX 200 index went as low as 4707, which was a long way from the 5,995 we saw in the middle of 2015.
What got me was the economic story then and in the future did not seem to vindicate the pessimism that drove that sell off. And that’s why I called it a buying opportunity. To be honest, when you encounter those hard to comprehend times someone like me ponders whether I’m missing something. However, because I try to look at everything from economics, market developments, corporate trends and politics, it told me being positive rather than negative made sense. The only thing I really feared was a black swan event.
In 2008, the black swan was the surprise revelation that credit ratings agencies had been gilding the lily on the safety of credit default swaps linked to US home loans. That kind of news story can rock all the other analysis that someone like me operates off and remains the one big imponderable.
The year of 2016 has taught me that political concerns about seeable white swans, if you like, are often a buying opportunity with both Brexit and Donald Trump’s win being classic cases in point.
With Brexit, the Bank of England and the Chancellor of the Exchequer both calmed the markets with promises to offset the expected negatives of an exit from the European Union and it worked. That was a buying opportunity lost.
Then Donald Trump’s election night speech was the catalyst for the market’s change of mind on the President-elect. In reality, however, the chief economist of Morgans, Michael Knox, pointed out on my TV show, on the Monday before the election, that modelling of both Donald’s and Hillary Clinton’s economic promises showed the former’s game plan was better for the US economy. That speech and the reality of Donald ‘being there’, which reminds me of the Peter Seller’s movie on the same name, made markets revise their view on a Trump Presidency and we’ve been off to the races ever since.
Another buying opportunity missed.
One buying opportunity I was onto was the BHP Billiton sell off. I wanted my experts to tell me that BHP at $14 had to be a decent medium-term buy for those who could wait for nice returns, but no one gave me the leg up.
I eventually ventured in myself in the $15 plus region, when the trend had turned and looked convincing, as Gary Stone of Sharewealth Systems often lectures us to look for, but I never expected to see $26 before the year was up!
I would’ve been happy with that price after three years which would have been a gain of 60% or 20% a year plus dividends and franking credits.
This is an important lesson for all of us. Sometimes markets overreact and if quality companies get into a silly price territory and there is no industry, management or government permanent threat to their longevity as well as future profitability, they are often great buying opportunities.
Another trend that I kept asking for my experts to support me on was with the banks and the top 20 stocks generally. I have to say my colleague, Paul Rickard, regularly supported me on my question: “Is it time to chase big cap stocks?”
After two years of mid-cap and small cap stocks shooting the lights out while the top 20 laboured, it seemed like the wise contrarian play was to back our best 20 companies, when they were down and unloved.
Of course, if my economic view was negative, I might have played a waiting game, but as you know, I was positive on our economy and the USA. I was not a doomsday merchant on China and some OK news kept coming out from Japan and Europe, so I kept rooting for our top 20 stocks.
The miners were already on the rise before Donald’s win but banks really benefited from his victory and fund managers started to sell their small- and mid-cap stocks to take profit to plough into bigger cap stocks.
I thought then that this has created another buying opportunity for those small- and mid-cap companies that have been dumped too heavily. That should be the trend to think about for 2017.
I’ll be looking for some good companies that have been over-beaten, post-Trump.
In many ways 2016 has proved right yet again the Warren Buffet advice: “Be greedy when others are fearful.” But you have to be greedy for quality companies that the short-term nature of the market has mispriced.
This year has reminded us about being diversified and not having a too narrow focus on a couple of sectors.
Next year looks poised to be a good one because the consensus is that both the outlooks for earnings and the economy — here and overseas — are positive.
That means you should expect me to be still calling buying opportunities when they emerge but I will be watching to make sure the US stock market doesn’t go from the optimistic stage to the euphoric one. That’s when the you-know-what can hit the fan and it’s usually delivered via a black swan.
I know black swans are largely un-seeable — black swans — but that won’t stop me looking for them.
My wish for next year is that we think about creating a portfolio that will always deliver consistent income. And that means if we miss the next black swan, then we can use the next crash as another big buying opportunity!
Have a great Christmas and holiday season and remember short-term traders are like punters while investors are wealth-builders with time on their side.
I wish good fortune and peace to all of you. Thank you for supporting what we do.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
