Thinkpiece

01 Aug Thinkpiece

In this update: 

• Your response to difficult markets
• Margin of Safety
• Opportunity
• Take a long term view

Your Response to difficult markets

As the financial difficulties deepen within global economies, which I have previously written about in other updates, we find ourselves tested – private individuals, governments, institutions and businesses will all feel the effects of the downturn.

At the present time, the tectonic plates of the financial system are adjusting, particularly to the outlook for inflation, but at some stage they will fuse, forming the bottom of the (stock) market.

Those households or businesses that have been living on the edge, will come under relentless pressure. 

The stock market is a device for transferring money from the impatient to the patient.

Warren Buffett

This is perfectly normal. As I have said previously, what is happening economically now has been seen many times before, and will happen again and again in the future. That’s not the problem. The problem is how well buttressed and prepared your plan is for seeing you through to the other side.

The external conditions are unique – the Ukraine / Russia War, a significant rise in energy, food and other costs, disruption to supply chains etc.

‘This time it’s different’– the four most expensive words in the English language

Sir John Marks Templeton

People and businesses will continue to experience financial pressure for some time after markets form the bottom, as there is a significant lag between (stock) markets and the economy. As the market builds momentum through recovery, it takes some time for that to be felt in our pockets.

Margin of Safety

Those that have highly stressed balance sheets, for example,  carrying significant liabilities or making discretionary spending that cannot be supported, or those drawing up to or beyond the capabilities of their portfolios, will come under pressure. A price will be paid sooner or later for this choice. 

Those that have room to manoeuvre, and hold some liquidity, will be better able to continue with their financial plan unabated.

If you have put money by for such eventualities as market corrections and bear markets, then well done. If you haven’t but have scope to do so now, then don’t wait, start building up your emergency fund.

I refer to this emergency fund as a margin of safety.

There is no hard and fast rule as to how much money you should put by for emergencies, and this is a personal decision, but as a guide, 6 – 9 months worth of expenditure is a good start. 

A healthy margin of safety will stop you having to sell your investments and interrupt the compounding process at the most vital time. It will allow you to make that necessary purchase, without interrupting the investment process. It will stop you having to capitulate under the pressure of diminishing resources. It will ensure you can continue with your financial plan, without risk of undermining your future financial independence.

When markets recover, this emergency fund can then be replenished from the increased value of your investment portfolio, subject to advice.

Timing is everything.  

I espouse this all the time, and yet very few have put in place a suitable margin of safety.

Someone is sitting in the shade today because someone planted a tree a long time ago.

Warren Buffett

Opportunity

Nothing in markets is ever dormant. It may appear that markets go quiet at times, but in fact this is just a precursor to change. The whole thing is changing and adjusting to itself constantly.

Investing during uncertain markets, allows for unique opportunities that are not apparent during rising (Bull) markets.

Those investing on a regular basis can buy some of the best businesses in the world at a significant discount.

A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.

Warren Buffett

Take a long term view

One way to avoid significant market volatility, is not to look at your portfolio very often. What good will it do? It’s not going to change because you do look at it.

It’s entirely understandable….but stick to your plan. What was the reason you invested in the first place? What were your objectives?

A knee jerk reaction now is not going to help those long terms plans you made. Don’t be tempted, no matter how strong the pull is. Your future self will not thank you for reacting in this way. Your future self will thank you for responding appropriately. There’s a big difference.

Our favourite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.

Warren Buffett

Summary

• Understand that how you respond during difficult markets can make a world of difference.
• Be patient. Remember economically, this time isn’t different. 
• Make sure you have a suitable margin of safety in place, and keep it in proportion with your wider arrangements at all times.
• If you have surplus funds, remember the opportunity of buying funds invested into businesses at discount prices, but don’t compromise on your margin of safety.
• Take a long term view.

If you wait for the robins, spring will be over.

Warren Buffett

If you’ve not yet put in place a sound financial plan and you’d like to know more, please feel free to contact us on
01626 305318 or via email here.

The views expressed are not to be taken as financial advice. Professional advice should be sought before proceeding.