Picking the best low-hanging fruit where few others look -- for cents on the dollar

This probably won’t end well…

David Portnoy and men giving an interview

I’ve written before that the stock market is currently a very strange place. Despite one of the biggest shocks to the global economy in decades from the coronavirus pandemic, and demand destruction on a scale rarely ever seen, retail investors are partying like it’s 1999 or 2007 (the boom years ahead of the last two major stock market busts). On the other hand, professional investors, some of whom get paid stupid amounts of money to do their job, are generally very cautious, cashed up, and sounding the alarm.

The latest to do so is Australia’s richest fund manager, Hamish Douglass, who is a self-made billionaire because of his skill at running funds management companies and managing money.

As he points out, nobody can know what’s ahead. And the more attention you pay to the scientists with intricate knowledge of coronavirus and epidemiology, the less confident the answers to the many outstanding questions become.

  • They still know very little about this virus.
  • They don’t definitively know where it came from, or when.
  • They don’t know exactly how it spreads.
  • They don’t really know what the incubation period is.
  • They don’t know if asymptomatic people can really spread it.
  • They don’t know the long-term effects.
  • They don’t know if you develop immunity.
  • They don’t know if you can get it again.
  • They don’t know whether if you show antibodies it means you are immune.
  • They don’t know if wearing masks helps.
  • They don’t know if the weather has an effect.
  • They don’t know if certain medicines help or not.
  • They don’t really know if an effective vaccine will ever be developed.

Amid all this uncertainty in the real world, it’s no wonder that in the stock market, the pros are selling to the amateurs.

Retail investors in Australia have been net buyers of $9 billion in shares since March, while institutional investors have been net sellers of $11 billion. That’s a sobering statistic.

In the US, popular stock trading app Robinhood which charges zero brokerage has seen active users jump from 10 to 13 million since March.

The retail momentum investors and Robinhood “bros,” personified by sports betting mogul turned day trading cheerleader David Portnoy of Barstool Sports, think making money in the stock market is as simple as buying the dips and riding the momentum, or so it would appear.

For now, they look like geniuses. Meanwhile, many professional investors, including such luminaries as Jeremy Grantham and Warren Buffett look like chumps.

If we look back to 1999 and/or 2007, we know how the story ends – momentum stocks eventually crashed and value stocks survived and thrived.

Here’s the thing…

Good investing isn’t just about making money in a roaring bull market

Good investing is about following a tried and true investment system. The end result of following the system is that it makes money, on average, over time, through ALL SORTS of market cycles.

For now, the system many amateurs appear to be using is working for them. It may continue to do so. I make no claim either way.

But the storied value investors who have built up their reputations over decades are simply following their own systems. Right now, that has them largely side-lined, or not making money.

They don’t really care. They care about being true to their system and making money in the long run. Now, it could be that their systems have stopped working permanently, and not just temporarily. That’s the big question.

I doubt it. Each time that claim was made in the past, it proved wrong. Why should this time be different?

Buying good businesses at the right price, and letting them compound earnings and cash flow over long periods of time is a tried and true method to creating wealth from the stock market.

If you can stomach the occasional 50% draw-down over the course of your investing lifetime, buying and holding index funds is another proven approach, though as I have written elsewhere, I find it intellectually absurd to do that. So, it’s not for me.

What I’m trying to do with Global Value Hunter and my soon to launch African Lions Fund, is to take positions in growing companies trading at value stock like multiples. You don’t find that opportunity in developed country markets today. You have to go further afield.

But rather than sit in cash like Grantham, Buffett, and Hamish Douglass, waiting for a correction that may or may not happen any time soon, I’d rather start deploying capital now, where the markets have ALREADY begun finding a bottom.

To join me, keep reading these missives, and consider the African Lions Fund.

Until next time,

Good Investing,

Tim Staermose
Global Value Hunter

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