By Ryan Irvine, Contributing Editor
Talk about a wild ride! The last two weeks have seen huge swings in the stock markets, up and down, as investors around the world try to figure out if we?re about to plunge back into a global recession or are poised for an accelerating recovery on the strength of strong U.S. GDP growth.
The mood shifts daily, even hourly, as new data is released. Here are some thoughts that may help you weather the turmoil and put yourself in a position to profit from it.
The toughest time to be an investor is when the market turns against you.
With Toronto?s main index hitting 20-month lows, the Dow touching 15-month lows, oil and the Canadian dollar plunging, and China slowing at a faster pace than expected, investors are facing real challenges.
At the time of writing, the S&P/TSX Composite Index was off around 13% from its April highs after trading down as low as 16% this past Monday. A drop of 10% or more is considered a correction, which tests the metal of seasoned investors and can be deadly to many novices or beginners.
But the real money is made in down markets, not in bull runs.
Careful research that leads to astute purchases in down markets when great assets are on sale will position your portfolio to reap the rewards of the next bull. But investors need a disciplined plan in place and must stick to it. Be mindful of the broader market but focus on individual companies.
At present, we are seeing a significant correction that has been most acute in the growth and small-cap stock segment of the market. Near-term negatives are being magnified and in some select cases long-term fundamentals are being cast aside. To be clear, there is no ?blood in the streets? and we are not seeing anything close to the opportunities we saw in 2008-2009 or even when the markets dropped in mid-2012 and 2013. But we do see the potential for some strong opportunities to present themselves.
However, as we have stated many times over the past 12 months, there is no hurry to jump into the market. Broader valuations have been high and have been due for a correction. In fact, we continue to advocate only select buying. Begin with ?half positions? in good companies and keep a far higher level of cash on the sidelines than we typically advocate. At present, KeyStone?s Small-Cap Growth Stock Portfolio is holding an approximate 40% cash position, a level we have maintained for much of 2015. This has set us up very well for some long-term buying opportunities that will inevitably develop. We remain patient in this regard as the market almost always overshoots underlying fundamentals to both the up and downside.
Corrections like we are currently witnessing are precisely why we recommend investors build their 10-12 stock small-cap growth and income portfolios slowly over a 12 to 18-month period.
This disciplined approach will help prevent you from buying all your key assets at what might be the top in a given year or market cycle. April may very well be an example of this in 2015. Mistakes are made when investors feel the absolute need to jump in (almost like they are “missing out”) and buy 10-12 stocks in a month?s time. Sure, it would be great if you hit a one or two year market low, but the likelihood of that occurring is low.
Quick strategies
Corrections or bear markets do not last forever. In fact, the pain can be violent and swift, quickly cutting the fat off the market and leaving in its wake a period of consolidation which is when most investors are fearful but great investors should become greedy. However, this greed does not mean you should buy indiscriminately. Here are a couple of strategies to employ when buying in down markets.
Layer into positions. When deciding to buy a stock, particularly one you are purchasing for its solid long-term fundamentals, you do not have to buy your full position in a single trade. You have the option of breaking the trade up into two or more pieces. Picking a bottom is often a fool?s game. If you are comfortable with the long-term outlook and the stock is trading at reasonable to cheap valuations, the prudent course in a volatile market is to begin with a partial position. For example, say you wanted to buy $10,000 worth of XYZ Corporation. Start with a $5,000 position and add to it in a month or so. You may be paying more or less at that time, but it will allow the volatility to settle and stability to return.
Create a watch list. My organization maintains a list of great companies with solid growth and strong balance sheets that we constantly monitor for attractive entry points. I suggest any good investor should do the same (or allow us to do it for you). For the first seven months of 2015, most companies on our monitor list appeared expensive, but with the market correcting we are starting to see value. However, that value is not close to bargain basement levels for the most part. We will buy some of these stocks in the future, while some will never hit an appropriate entry point. We are disciplined and patient with these stocks and choose to buy quality at great prices rather than quantity.
There are a number of market sectors and niches that we continue to monitor closely. After some healthy gains over the past couple years, the healthcare sector has sold off sharply, particularly in Canada. We are seeing some value begin to emerge here. We will update our top selection in this segment next month.
We continue to get calls and emails regarding whether now is the time to re-enter energy stocks in a meaningful way. At present, we remain very lightly exposed to this segment in our small-cap research. If we were to enter the energy sector in 2015, it would likely occur in December as beaten down oil and gas related stocks should once again face significant tax loss selling. We will be looking for cash rich companies that have managed to remain profitable with limited to no debt.
We remain firmly of the belief that those Canadian companies with positive exposure to the U.S. dollar will continue to outperform. These include a number of the companies in our Canadian Small-Cap Growth Stock Portfolio such as long-time favorite Boyd Group Income Fund and our sole current energy related buy High Arctic Energy Services. Updates follow.
Ryan Irvine is the CEO of KeyStone Financial (www.KeyStocks.com) and is one of the country?s top experts in small cap stocks. He is based in the Vancouver area.