Touchbutton 82 – The real thing

Over the last decade or so, investors have had to get their minds around businesses that often do not appear to do that much, don’t make money, and seem wildly overvalued to any seasoned (read ‘old’) investor. There are signs this may be about to change.

One of our favoured active US fund managers put it quite simply: this is the time to focus somewhat more on owning “real stuff” – that is to say, quite often companies that have an understandable business model, pricing power (the ability to raise prices in inflationary times) not to mention old fashioned attributes such as paying a dividend from time to time.

“It requires patience and a strong constitution during periods of market duress to gain the most in the longer run.”

So far, so good. A return to applying fundamental analysis to equity markets will be welcomed by many, but it will not necessarily reduce, let alone eliminate, the inherent risks that prevail in stockmarket investment, especially over the shorter term. It requires patience and a strong constitution during periods of market duress to gain the most in the longer run. Over the past 15 years, for example, missing just the best ten days in the broad UK stockmarket would have reduced one’s total investment return, including reinvested dividends, from almost 5% per annum to virtually zero. This last sentence should be read again by anyone who believes that they can predict when those ten days might occur!

Although it has been tempting to take cover at times during the first quarter of 2022 (and on countless other occasions) by reducing stockmarket exposure, the right thing to do has been to hold one’s nerve, and be guided by longer-term experience that reversals are often over quickly, particularly for investments supported by solid foundations. Nobody should be complacent about the heightened risks that currently threaten market stability, but our own view is that a lot of uncertainty is already priced in at current levels.

“…the right thing to do has been to hold one’s nerve, and be guided by longer-term experience…”

Now, perhaps more than ever, is a time to maintain a highly disciplined approach and focus on long-term objectives. This approach has proved in the past to be the right way to navigate periods of geopolitical uncertainty and inflation, and should continue to be so.

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