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What would you buy and hold if every stock was -40% off?

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MrChow

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Pretend history repeats and we're in a similar situation to October 2008 (without knowing the future).

The market is down -40% during a financial crisis.

What types of stocks would you look to buy and why?

My thought might be a non-cyclical with high ROI like CSL.
 

Buy ones that will get bailed out.
 
In late 2008 i bought MRE, LGL, MDL and TRY.

Nickel, gold, gold and more gold...paid off to, sold MDL and LGL in early 2009 and pocketed around 6K in profit and freed up about 17K right at the bottom of the market.

Trade Confirmation: BUY 200 CSL @ 30.200000 (25/05/2009) how i wish i had more patience with this one. ): once in a life time.
 
Whenever it happens, and history is pretty clear that every so often there's a major fall in the market, I'll be buying shares in companies which:

1. Have an ongoing established business likely to continue.

2. Have been profitable under normal economic circumstances.

3. Have a decent return on equity.

4. Have paid dividends over many years. I'm not too fussy about the amount but it's harder to fudge the accounts if you're actually paying out cash to investors year after year and aren't raising new capital with which to do so. Helps confirm that the business is reasonably sound.

That's the first level of research. Beyond that I'm cautious about anything where the underlying industry is in structural decline, is at odds with government (or a credible opposition party) policies or is subject to one major incident wrecking the company's finances either directly or through loss of reputation. I'll only invest in things like that if the expected return is high enough to warrant taking the risk.
 
In 2008/09 I was buying the banks mostly. I remember buying CBA for around $24 and with the wife and I both holding parcels I double dipped on the discounted shareholders offers to buy more.

If it happened now I would buy high dividend ETF's for my super fund. I would buy, VHY, RDV and SYI. They all pay reliable quarterly dividends and that's what us retirees need.
 


Your probably after a discussion on stocks – but let’s take a little side trip from “look” to buy too “actually” buy.


And the most like answer is nothing and if you do buy it probably won’t be much because you’ll be as scared as everybody else and if you do manage to buy a bit of something you’ll probably be pretty trigger happy to exit it and snatch a quick profit or cut a drawdown.


If something is worth buying 40% cheaper is it worth buying at 20% cheaper or even now?


So you can ignore the heard and buy in bulk at the bottom – there is still a trade off between keeping your powder dry rusting in a bank (2%) as you wait for your 40% discount and investing at a higher yield right now.(current equity yield ~6%). Even if you can act decisively at the bottom will it arrive in time to make the waiting option the better bet?


40% down from here (5,800) would be the equivalent of 1974 in deviation from the linear regressed mean of the XAO and that’s the only time it has deviated that far in its history. So you could be waiting a while.


If you go the stay invested route, you by definition aren’t going to have much more than dividend stream to invest at the bottom but at least you’ll probably be drilled enough to keep re-investing continuously (which will accidently include the bottom) and hold through the recovery. (As long as your businesses stay sound of course)


Sorry for the side tripping – but I reckon waiting for market corrections is a very costly mistake of omission in very many cases. If something meets your quality and hurdle rates – buy it now! Unless you have near/med term liquidity requirements in which case don’t “invest” in equities – they are a long duration asset.
 
Scenario would still apply whether you have 1% or 100% cash to deploy at the time.

Would your criteria remain the same in all market conditions like how Buffett ignores the overall ups and downs?
 
It is actually not that straightforward to know what to buy when the whole market is down significantly. In 2008/09 I thought I was really clever buying an ETF over the ASX200 at what turned out to be very close to the bottom in March 09 (about 3200) but that was actually the wrong decision: apart from ETFs often lagging the index they track (due to ETF holdings not exactly mirroring the underlying and more in built costs than you might expect which compound the lag over time) I found to my chagrin and surprise that a year or two later I had only made a 20-30% return. This is after one of the greatest bear markets in history.

On reflection, I realised that what I should have done is - rather than look for broad exposure to the market or even robust companies that will plod away through thick and thin - buy deep cyclicals. The reason for this is because, provided they make it through (a big if, but the thinking is that the majority of those that have failed will have failed by the time of a 30-40% market pullback) then they will enjoy far greater margin and profitability expansion than the companies that have been profitable throughout.

This is simple maths: to go from 1 (or even -5) to 10 is a much percentage increase than to go from 10 to 20. Multiple expansion often compounds this increase.

So buy Flight Centre (from $4 to $20 in a year and at one point $60) or mining contractors or service providers rather than supermarkets or non-cyclicals (which is what you should be holding - although of course cash would be better - prior to the 30-40% broad market fall).

This is not to say I am not a fan of dollar cost averaging into ETFs as an entirely legitimate and profitable exercise for almost all investors, it is just not the correct play at market bottom.
 
That's the philosophical debate about cyclicals vs non cyclicals.

I don't think I'd sleep well with the potential of entire loss of capital, like a bank compared to a supermarket.

Unfortunately companies like WOW, TLS, AGL have their own industry challenges and healthcare multiples have vastly expanded for companies like RHC and generally have lower ROC and higher debt.

Maybe you just stick to your usual processes, assuming they work and let the wider variables do what they do, I'm still thinking about it.
 
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Caveat : How do you know if it is a fall based of fear or based on real fundamentals?
What if the government or monetary printing press does not/cannot provide the firepower to step in?


Greece and japan my favourites again. The market didn't come back like US and Australia.

1) Easy way out is to buy etf or maybe index tracking derivative. This gives me survivorship bias and requires no work at all or research only the timing part. But if it is really major will the counterparties of derivatives hold up??


2) Big banks (which would be part of an index anyway): I feel these would be protected by the government in a major catastrophe like they were around the world during GFC especially in the US. I don't see the gov bailing out woolies ahaha

3) Specific companies, I have no insight DYOR ...
 
luutzu said:
Buy ones that will get bailed out.
Click to expand...
You want to buy into companies who share holders had their equity destroyed in a bail out???

Remind me not to let you manage my funds, the "bail outs" were not good for shareholders, they were good for the government.

The US government made $22 Billion on the AIG bailout plan, AIG shareholders lost a lot more than that, you could say the $22 Billion Profit made buy the government came from the AIG Shareholders.

Listen to Hank Greenberg, he was an AIG share holder, he lost a about $3 Billion dollars, that $3 was transferred to the government, So don't act like the bailouts cost the government anything, they cost the share holders.

 

I came to this exact conclusion only two weeks ago. Historically, I've kept a 10-20% cash buffer 'in case' of such an event. The cost in such a case is quite high, given annualised returns on the funds that are invested (my ROC is calculated on the cash as well, but calculated it without for this exercise). The other part to this is I'm now a little more tolerant to price volatility (I wasn't initially) simply because I check prices a whole lot less often.

As for the question itself, in short I'd answer: my current portfolio of companies. I know them best and am holding because I believe they offer the best return for risk, and they meet my 'required' rates of return (hurdle rates).
Correct me if I'm wrong on this one, but if everything uniformly dropped 40%, then the risk/return equation doesn't change in relation to other holdings, only to cash (everything gets 40% cheaper, hence '40% more attractive'). So if your current holdings are not your answer, I'm a little curious as to why.
 

Say what?

AIG is still operational yes?

How's Lehman Bros and BearStearn? They went down the tube because the gov't didn't bail them out.

AIG still got to live and grow enough balls to sue the gov't that bailed them out.

What were they expecting? All that bail out money should be given to them? Or loaned to them at zero interest? Well, those free loans are in another form but that's another story.

Don't know man, in a real capitalist system, when a company does stupid thing and is about to go under because of it... the more responsible operator might step in and take over, completely. Not return it later for some profit.


And no, it's a pretty good idea to buy into companies you know will be bailed out after the crash and before the bail out was annouced.

Works pretty well for Berkshire when Buffett loaded up on GM and a few of the major banks that got bailed out.
 
Dude the fact that you are recommending buying into the bailed out company when their shareholders were wiped out shows you don't have a good understanding about what happened.

You should probably learn a bit more about it. How the hell were they "free loans", the bail outs were not designed to help shareholders, they were designed to keep the company running and make big profits for the government,
 

Couldn't be more accurate. Understanding why they were bailed out and the risks at the time is very important.
Just because a bank or financial institution was bailed out, it doesn't mean:
1) it was safe
2) it was a good investment

Yes, the government paid next to nothing, but that's because these institutions ultimately underestimated their liabilities were essentially unknown. The government didn't really know if it was going to bail them out again (at lower prices) or make a sh1tload of money.
What if AIG's derivatives book was even worse? That first bailout would've been very expensive in comparison
 


Oh look, AIG is still trading like it's not broke during the GFC if the gov't hasn't stepped in. Its share price is not zero and its shareholders didn't lose everything.

From about $7 a share in 2008, it's now at $63 a share.

Dam big slimy government! Stepping in and bailing them out [at $180Billion?], getting them over that rough bankruptcy spot.





I didn't say the gov't hand out free money. But that money doesn't need to be use to bail the likes of AIG out right? It can be use to bail out the individual homeowners; or the gov't could simply own the entirety of all of those banks and not give shareholders a dime.

When the executives starts a fire that led to a fire sale, real capitalism dictate that the exec and shareholders lost the lot. Right?

Not sit there, get all those billions and trillions; pay themselves big bonuses and then dividends... then have the nerve to complaint that the big bad gov't were being unfair.
 
If all stocks go down 40%, they don't necessarily become 40% cheaper if the earnings generation power of these stocks has also become impaired. Such statements are made in the belief that things always recover and price movements arise primarily from sentiment.

In the event that all stocks are off 40%, buying those whose earnings generation has been impaired the least is a good place to start. Energy and investment banks can blow up in a major stress event, but one suspects women will still need feminine hygiene products (eg. Asaleo). You can go a step further and determine discount to intrinsic value, if you have that ability.
 

I have a feeling you are making a case for me.
 
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